Raising interest rates is already dead, lowering interest rates should be immediate; At the end of the year market, stocks and bonds are in good luck
At the final interest rate meeting in 2023, the dovish tone of the Federal Reserve overnight undoubtedly amazed everyone: as expected, the Federal Reserve continued to stop raising interest rates, keeping the benchmark interest rate unchanged at 5.25% -5.5%. This is the third consecutive time the Federal Reserve has suspended interest rate hikes since raising rates by 25 basis points in July, and is also seen by the market as a de facto halt to rate hikes. In the most eye-catching interest rate chart, most central bank officials expect three interest rate cuts in 2024, exceeding the predictions of many industry institutions beforehand.
In fact, even Federal Reserve Powell, who was originally expected to release some hawkish remarks and suppress the market's expectation of interest rate reduction, showed an obvious dove turn in his position at the press conference after the overnight meeting, which even triggered the "roast" of Nick Timiraos, a well-known writer often regarded as the mouthpiece of the Federal Reserve
After Powell's press conference on Wednesday, Timiraos posted on the X platform, listing the "huge differences" in Powell's statements over just two weeks:
On December 1st, Powell said, "It's too early to speculate when the policy will loosen.".
On December 13th, Powell stated that interest rate cuts are "beginning to enter the picture" and "clearly a topic of discussion.".
Timiraos exclaimed, "In two weeks, you can see how much change there has been..."
Undoubtedly, even Timiraos, a "media insider", was so surprised by the dovish shift of the Federal Reserve that the global market would be so excited overnight. As of Wednesday's close, the Dow Jones Industrial Average has broken through the 37000 point mark for the first time and closed at a historic high of 37090 points, marking the Dow Jones Industrial Average's second historic high in nearly two years. At the same time, the US bond market also ushered in a night of sharp gains, with the 2-year US bond yield plummeting more than 30 basis points from its intraday high, marking the largest decline since the Silicon Valley banking crisis
The Great Change in Dot Matrix: Will the Federal Reserve Cut Interest Rates Three Times Next Year?
In our foresight yesterday, it was actually quite clear that the Federal Reserve's December interest rate chart is almost certain to lower its forecast for next year's interest rates compared to the September chart, but the downward shift is unlikely to reach the 4-5 rate cuts priced in the market. This also makes it very easy for the market to judge the degree of the Federal Reserve's hawk pigeon stance, as the interest rate chart will indicate how much interest rate will be cut next year.
At that time, CICC had anticipated that if the new chart showed significantly more rate cuts next year than twice, the market might interpret it as a dovish signal. And overnight, the Federal Reserve really showed such an unexpected dovish attitude.
The latest interest rate chart shows that the median forecast for the federal funds rate by the end of next year by 19 Federal Reserve officials is 4.6% (compared to 5.1% in the September chart), implying a 75 basis point (three 25 basis points) rate cut next year, with a significantly faster pace than the September forecast.
Meanwhile, the expectations given by officials vary greatly. Out of 19 officials, a total of 11 (accounting for nearly 53%) are expected to cut interest rates at least three times next year; Five officials (accounting for 26%) are expected to lower interest rates at least four times.
Among them, there is also a "pigeon king" who expects to cut interest rates six times next year - which is already in line with the latest market pricing after the overnight Federal Reserve rate decision.
The dot matrix also shows that Federal Reserve officials currently have a median forecast of 3.6% for the federal funds rate by the end of 2025, a 30 basis point decrease from September's expected 3.9%. At the end of 2026 and thereafter, the long-term federal funds rate remained unchanged from September expectations, remaining at 2.9% and 2.5%, respectively.
The adjustment in the wording of the meeting statement released simultaneously with the interest rate chart also highlights a shift in the tone of the Federal Reserve - officials have pointed out that they will monitor a series of economic data and developments to determine whether any further tightening of monetary policy is needed. The term "any" was not mentioned in the statement of the Federal Open Market Committee (FOMC) in November.
Another shift in the statement is that the FOMC acknowledges that the inflation rate has "eased in the past year but still remains at a high level.".
In addition, most participants now believe that inflation risk is roughly balanced. The Federal Reserve has lowered its inflation forecast for the next two years, with an expected core inflation rate of 2.4% next year. Decision makers have also slightly lowered their forecasts for next year's economic growth, but kept the unemployment rate forecast unchanged.
Powell's "Face Change": The Federal Reserve has begun discussing interest rate cuts
All voting parties, including Federal Reserve Chairman Powell, voted in favor of this monetary policy action. At the press conference after the meeting, the Federal Reserve also sent a "pigeon pie gift" to investors in the market
On the issue of whether the Federal Reserve is still likely to raise interest rates again, although Powell is still trying to "raise interest rates by mouth", his wording has also undergone significant adjustments. Powell stated at a press conference after the interest rate discussion that the policy interest rate is currently at or near its peak, but if conditions are appropriate and preparations are made to further tighten the policy, he emphasized that decision-makers do not want to rule out the possibility of further interest rate hikes.
The biggest highlight of Powell's speech that day was his first recognition that the Federal Reserve had begun discussing interest rate cuts. Powell stated that interest rate cuts have begun to enter the field of vision, and decision-makers are considering and discussing when it is appropriate to cut rates. Looking ahead, interest rate cuts have inevitably become a theme. "When is it appropriate to start relaxing existing policy restrictions? This question has begun to appear in people's vision, which is clearly a topic of global discussion and also a topic we are discussing at the meeting today."
Powell stated that he would not comment on the views of his colleagues at the Federal Reserve regarding the forecast of three rate cuts next year based on the interest rate chart feedback. Powell pointed out that the discussion on relaxing monetary policy has just begun, and the meeting did not discuss (in the chart) who has the correct expectations and hopes to significantly reduce the restrictive nature of policy interest rates before achieving the 2% inflation target. There is currently no discussion on shifting the direction of quantitative tightening.
Powell also stated that even if there is no economic recession, the Federal Reserve is willing to cut interest rates. And we won't wait until the 2% inflation rate to lower interest rates again, because it will be too late, exceed the target, and the policy will take some time to affect the economy.
In terms of inflation, Powell pointed out that the committee is still committed to the goal of reducing the inflation rate to 2%. Although inflation is still high, it has significantly eased. We welcome this progress, but we still need to see more. "Public opinion polls show that ordinary Americans still live in high prices, which is something that people are not happy with."
Pigeon Fed plunges financial markets into a year-end frenzy
According to the latest pricing in the interest rate market, after the Federal Reserve's decision and Powell's speech overnight, traders bet more than 70% on the probability of a rate cut by the Federal Reserve in March next year.
Meanwhile, people have estimated that the Federal Reserve will cut interest rates six times for the entire year next year, totaling 150 basis points.
Finance blogger Zerohidge pointed out that Federal Reserve Chairman Powell did not mention a word about the recent rapid shift in the financial environment towards easing (the tightening of financial conditions was the reason they suspended interest rate hikes at their September meeting), which largely allowed the overnight market's frenzy.
In the US stock market, the Dow Jones Industrial Average hit its first closing record high since January 2022 on Wednesday, and both the S&P 500 and Nasdaq rebounded to levels close to January 2022.
As of the close, the Dow Jones Industrial Average closed up 512.30 points, or 1.40%, at 37090.24 points; The Nasdaq rose 200.57 points, or 1.38%, to 14733.96 points; The S&P 500 index rose 63.39 points, or 1.37%, to 4707.09 points.
The yield of US Treasury bonds with different maturities plummeted across the board on Wednesday. The yield of two-year treasury bond fell 28 basis points to 4.451%; The yield of 10-year treasury bond fell 18 basis points to 4.026%; The yield difference of 2/10-year US treasury bond bonds was negative 43 basis points at the latest report, and the degree of curve inversion was reduced.
As shown in the figure below, the yield on 10-year US Treasury bonds has started to test below the 4% mark.
In the foreign exchange market, as the Federal Reserve "stood up", the Bloomberg dollar index has also fallen to its lowest level since the end of November:
The spot gold price skyrocketed over $40, returning to above $2000.
David Russell, Global Market Strategy Director at TradeStation, said, "It seems that Powell is no longer taking away the punch bowl. Traders had originally expected this press conference to be cautious, but in reality it appeared dovish as the Federal Reserve acknowledged that inflation has slowed down. This is a significant change in policy, indicating that policymakers believe there is not much need for a significant tightening of monetary policy."
Gina Bolvin, President of Bolvin Wealth Management Group, pointed out that, "The Federal Reserve gave the market an early holiday gift today, and they finally made a positive comment on inflation for the first time. I want to say that as they acknowledge that inflation is declining, we have seen a key point. It seems that the Federal Reserve is moving in the direction of the market, not the market. The market's Santa Claus rally may continue."
It is worth mentioning that "New Bond King" and founder of Double Line Capital, Gonlak, even believed that after the Federal Reserve's decision overnight, although the Fed only hinted at a three time interest rate cut next year, it may actually be forced to cut interest rates more times.
He said that the Fed's inaction is a current trend; The Federal Reserve believes that they have completed their own interest rate hikes in this cycle; The year-on-year increase in US CPI may drop to 2.4% by June 2024; It is expected that the yield of US treasury bond bonds will fall below 4.0% by 2024, which may be at the low end of the range of 3.0% -3.99%; The yield curve may reverse in the first half of 2024, ending the current inverted state; The Federal Reserve may have to cut interest rates more than expected.
China International Capital Corporation (CICC) pointed out that the stance of the Federal Reserve this time is more dovish than we expected. Not only does the dot matrix suggest that there may be three interest rate cuts in 2024, but also compared to two weeks ago when Powell believed that the discussion of interest rate cuts was still immature. This time, CICC stated that there has been a significant change in the discussion of interest rate cuts "beginning to come into view". At one point, the market was worried that it would be beaten by the Federal Reserve if it had run too fast before, but the result was that the Federal Reserve was actually "approaching" the market.