On July 31st local time, the Federal Reserve maintained a "no action" stance in its latest interest rate decision, and Federal Reserve Chairman Powell sent an important signal in his subsequent speech. Affected by this, the US dollar index further fell to test the 104 level, approaching a 5-month low. The three major US stock indices collectively rose, with the Nasdaq rising more than 2.6%.
The Federal Reserve maintains interest rates unchanged, implying that it may cut interest rates in September this year
The Federal Reserve announced on July 31st that it will maintain the target range for the federal funds rate between 5.25% and 5.5% unchanged.
Federal Reserve Chairman Powell subsequently held a press conference on the Federal Funds Rate policy released by the Fed that day. Powell stated that the inflation data for the second quarter has increased the Fed's confidence and has made "some further progress" in achieving the 2% inflation target. If the inflation test is met, the Fed may cut interest rates as early as September, and emphasized that all decisions made by the Fed are "absolutely" non political and unrelated to the upcoming presidential election. Powell hinted in response to questions that the possibility of a 50 basis point interest rate cut is unlikely.
Powell said that the current economy in the United States looks completely different from a year ago. He described the current economy as an "unusual" and "popular outcome in history". He stated that members of the Federal Reserve are closely monitoring the recent rise in unemployment rates and potential weakness in the labor market, and as inflation cools down, the Fed is able to balance prices and the labor market more equally. He pointed out that currently, low unemployment rates and low levels of layoffs indicate that the labor market is normalizing.
Institutions predict that a rate cut in September is a highly probable event
CITIC Securities pointed out that the Federal Reserve's July 2024 interest rate meeting will continue to maintain interest rates unchanged, which is in line with market expectations. The statement of the interest rate meeting has undergone significant changes compared to the previous one, indicating increased confidence in the cooling of inflation. Powell's speech was generally neutral and dovish, with "overall," "normalization," and "balance" being the core words. Compared to his speech in June, which focused on controlling inflation, there was significantly more space in this speech on the job market, emphasizing the risk of balancing the economy and inflation. If there is no fluctuation in US inflation in July and August, it is expected that the Federal Reserve will implement its first risk managed interest rate cut in September, guiding the US economy to a "soft landing".
China International Capital Corporation (CICC) pointed out that from the statement of this meeting and Powell's press conference after the meeting, the Federal Reserve has given further hints about the September interest rate cut, emphasizing that inflationary pressures have eased and that attention should be paid to the balance between employment and inflation risks, rather than just inflation risks. All of these implied that if there are no unexpected events (inflation continues to fall before the September interest rate cut), the September interest rate cut should be a highly probable event.
Huatai Securities pointed out that considering Powell's clear guidance on interest rate cuts, if there is no particularly unexpected data in July and August, it is expected that the Federal Reserve will adjust the dot matrix chart and start the interest rate cut cycle at its September 18th meeting. The path of subsequent interest rate cuts still depends on data performance, especially employment data: if the economy maintains a normalization trend and the job market does not deteriorate beyond expectations, the Federal Reserve may not continue to cut interest rates, and it is expected to cut interest rates again in the fourth quarter. However, if the job market deteriorates beyond expectations and the unemployment rate rises rapidly, the possibility of the Federal Reserve continuing to cut interest rates cannot be ruled out.
What impact does it have on the market?
CITIC Securities pointed out that in the short term, it is expected that interest rate cuts will become the major background before the implementation of interest rate cuts. The US dollar index and US bond rates may fluctuate weakly, and the expectation of short-term liquidity easing may bring certain benefits to the US stock market and support the growth style. After the interest rate meeting, the market performance showed that the Nasdaq>; S&P 500>; The Dow Jones.
Ping An Securities pointed out that the market may gradually transition from "recession trading" to "soft landing trading" in the near future, both of which are based on the expectation that the Federal Reserve will soon start cutting interest rates. However, the difference is that there is still room for upward adjustment in the market's judgment of the US economy, and concerns about the "unexpected cooling" of the economy are expected to decrease, which may lead to more restrained bets on significant and rapid interest rate cuts. Specifically, this may be reflected in the expected resilience of US bond rates and the US dollar index, and the expected end of the US stock market adjustment.