On the 19th local time, the two-day September monetary policy meeting of the Federal Reserve will officially kick off in Washington.
As the Federal Reserve may begin discussing the timing of interest rate cuts, this interest rate meeting has undoubtedly attracted countless attention. The institution expects that the Federal Open Market Committee (FOMC) will maintain an observation mode, and Federal Reserve Chairman Powell's attitude on interest rate cuts remains the focus. Investors will look for clues from the latest quarterly outlook report (SEP), as there are many signs of cooling in recent indicators, the Federal Reserve may make fine-tuning in the economic and interest rate paths.
There are obvious differences in internal views
With signs of economic cooling and gradual easing of inflation, the Federal Reserve's monetary policy is taking effect. According to a summary by First Financial reporters, there are three factions within the Federal Reserve regarding whether further action is needed.
Unlike previous meetings, the FOMC has the first official to mention interest rate cuts - Federal Reserve Director Christopher Waller. As a hawkish and influential voice within the Federal Reserve, his shift in stance has surprised the outside world. "I increasingly believe that current policies can effectively slow down economic growth and restore inflation to 2%. I am confident in achieving this without a significant increase in unemployment," Waller said. "If inflation continues to decline, there is no reason to insist on keeping interest rates high.".
Most officials support staying put. Powell stated in his speech before the period of silence that it is too early to believe that monetary policy is sufficiently tight. "We may not have felt the full impact of the policy yet. A strong response to inflation also helps maintain the Federal Reserve's hard-earned reputation and ensure that public expectations for future inflation remain stable." When it comes to policy risks, he believes that the risks of insufficient and excessive tightening are becoming more balanced.
Williams, the third in command of the Federal Reserve and Chairman of the New York Fed, believes that the Fed's benchmark interest rate may have already reached its peak. Williams stated that his research indicates that the Federal Reserve's interest rate policy stance is "quite strict", "in fact, it is estimated to be the most restrictive in 25 years."
As an important advisor to Powell, Williams expects it to be appropriate to maintain a restrictive stance for a considerable period of time to bring inflation back to the long-term target of 2%. "Nevertheless, the future remains highly uncertain, and our decisions will continue to depend on data," he further said. "The risk is twofold, and if price pressure and imbalances persist beyond expectations, further policies may be needed."
Only Federal Reserve Director Bowman and Cleveland Fed Chairman Mest are on the hawkish side and are expected to raise interest rates again. Last month, Mester stated, "The real issue now is how long we need to maintain a restrictive stance, and perhaps even raise it, considering what is happening in the economy." She believes that it is too early for financial markets to focus on interest rate cuts, and relaxing monetary policy is not yet part of the discussion.
Institutions generally expect that differences in stance will not affect the final voting result, and the market has basically fully priced the meeting for the third consecutive time to maintain interest rates unchanged. The focus of the outside world is undoubtedly on the latest SEP report and Powell's speech at the press conference.
This table requires special attention
At this meeting, the Federal Reserve will release its final quarterly economic outlook (SEP) and dot matrix for the year, which are important information for external evaluations of future policy path clues.
In terms of economy and inflation, compared to September, multiple data shows that consumer demand and business activities are facing obstacles. Considering the manifestation of the lagging effect of monetary policy, it is expected that the economic growth rate and inflation will decrease year-on-year next year, while the unemployment rate may adjust upwards. New York Fed Chairman Williams previously predicted that the Fed's most important inflation indicator, PCE, would drop to around 2.25% in 2024 and approach 2% in 2025. At the same time, he predicts that the economy will slow down to 1.25% next year.
The prediction of unemployment rate is worth paying attention to. Although the number of layoffs is still at a historic low, other reports show that companies are reducing recruitment numbers, and the tense labor market seems to be loosening. In October 2023, the number of job vacancies decreased by 617000 compared to the previous month, to 8.733 million, the lowest level since March 2021.
Craig Erlam, senior market analyst at Oanda, said in an interview with First Financial reporters that high interest rates are having an impact on the economy. As savings decrease and income growth slows down, many American households are slowing down their purchases of large commodities such as houses and cars.
The credit report released by the Federal Reserve last week showed that the total consumer credit in October increased by $5.2 billion, a growth of 1.2%, lower than the previous 3%. The growth rate of non revolving credit, mainly focused on automobiles and student loans, has decreased to 0.7%. According to Erram's analysis, the labor market becomes even more important at this time. "The change in unemployment rate will become a forward-looking signal for future consumer spending, and it is also the key to achieving a soft landing. With the expectation of economic slowdown, the first quarter of next year may be a turning point."
As the current tightening cycle approaches its end, the focus of the outside world has shifted towards interest rate cuts. According to federal funds rate futures, the likelihood of a rate cut in May next year is around 60%. Bob Schwartz, senior economist at the Oxford Institute of Economics, told First Financial reporters that the United States is expected to have a period of sustained below trend growth in 2024 (economic growth rate below 2%). "The bigger question is how long the Federal Reserve needs to maintain policy at a restrictive level before starting to relax, and at this point, it is currently impossible to get an answer," he said.
The outside world will closely monitor the dot matrix that reflects the Federal Reserve's interest rate forecast. Goldman Sachs and Wells Fargo Bank believe that the median for 2024 will be lowered from 5.125% in September to 4.875%, equivalent to two interest rate cuts, similar to September. James Knightley, Chief International Economist of ING, said, "To what extent will the committee support the market's view of a significant interest rate cut? We strongly suspect that there will be a lot of resistance."
Erram told reporters that the information that the dot matrix can reveal may be quite limited, and this will not tell the outside world when the easing cycle will start. In contrast, Powell's comments on interest rate cuts are more practical. However, he believes that the Federal Reserve will not give any clear indication here, and the position of data dependence will continue.