Federal Reserve Chairman Powell will deliver a speech on the economic outlook at the New York Economic Club on the 19th local time, which is also the most important official statement before the silent period of next month's policy meeting.
The market will closely monitor Powell's views on the recent trend of US Treasury bonds, which many officials previously believed may mean that there is no need to raise interest rates in the future. However, employment and consumption data suggest that it may be difficult for inflation to cool down smoothly in the future. For the Chairman of the Federal Reserve, it will be a multiple challenge to avoid market panic and economic concerns while releasing patience and preserving policy choices.
How to evaluate the volatility of US bonds
Since the Federal Reserve announced a rate hike in July, the yield on medium to long-term US bonds has generally risen by over 100 basis points.
This will bring greater uncertainty to the US economy. Federal Reserve Vice Chairman Philip Jefferson said in a speech to the American Association for Business Economics (NABE) on the 9th, "We are in a sensitive period of risk management and must balance the risks of policies being too loose or too restrictive. We need to keep this in mind when evaluating future policies
It is worth noting that the escalation of the situation in the Middle East has also exacerbated external concerns. At the same time, the candidate for the Speaker of the United States House of Representatives remains unresolved, and the bipartisan differences have made it uncertain whether the US government can once again avoid a shutdown before the end of the year.
How to interpret the changes in the US bond market as a consideration factor for future policy decisions. Last week, Minneapolis Fed Chairman Neel Kashkari stated that the recent increase in yields is "confusing", which may be driven by economic optimism over the next 5 to 10 years, or a possibility that the market expects the Fed to take more proactive measures to control inflation.
However, the frenzy of US Treasury bonds may distort the performance of economic data and affect the Federal Reserve's judgment of the economy. Boston Fed Chairman Collins recently stated in his regular speech that the rise in long-term yields indicates a tightening of financial conditions. If this situation continues, it is likely to reduce the need for further tightening of monetary policy in the short term. However, he mentioned that the current economic environment requires the Federal Reserve to be patient in order to "distinguish between signals and noise" in upcoming data.
Sal Guatieri, senior economist at Bank of Montreal, said in an interview with First Financial reporters that the Federal Reserve will closely monitor the trend of US Treasury bonds. Although this may help slow inflation, there is also a possibility of serious economic damage. The gap between the 10-year US Treasury bond and the federal funds interest rate is currently narrowing. From a historical perspective, if US Treasuries continue to rise and exceed interest rates, monetary policy will face a real test, as has happened in recent recessions without exception.
Do you want to keep the option of raising interest rates
The monthly growth rate of US retail sales in September, announced this week, was 0.7%, far exceeding market expectations. Affected by this, the Atlanta Federal Reserve's GDPNow tool adjusted the US economic growth rate to 5.4% in the third quarter.
While the economy has shown resilience, the anti inflation process in the United States is facing challenges due to factors such as the rebound in oil prices. The Consumer Price Index (CPI) report released last week showed that housing inflation is still hot, and it is predicted that service industry prices are also rapidly rising, which in turn drives up core inflation pressure. Federal funds interest rate futures show that the market has slightly increased the pricing of interest rate hikes within the year, while the space for interest rate cuts next year is gradually narrowing.
Guatieri told First Financial that if the economy slows down and inflation returns in the future, the Federal Reserve should have reached the end of the tightening cycle. "However, Powell may emphasize that achieving the inflation target is still far away and reiterate that policy decisions depend on data, and the option to raise interest rates in the future will be preserved." At the same time, he expects Powell to continue to suppress speculation about the prospects of interest rate cuts or other changes in Federal Reserve policy, such as shrinking the balance sheet.
Wells Fargo believes that if there is stronger evidence that price pressures and economic activity are cooling down, officials will feel more reassured about the decision to continue maintaining interest rate stability. According to the current situation, it is unlikely that the Federal Reserve will issue a plan to indefinitely suspend interest rate hikes or exclude interest rate hikes in December.
Recently, the volatility of US stocks has intensified, partly due to investors' concerns that the Fed's policy mistakes will ultimately lead to a hard landing for the US economy. From a historical perspective, there have been numerous examples of excessive policy intensity leading to recession. TS Lombard Chief US Economist Steven Blitz said that once US data continues to heat up, the Federal Reserve will choose to raise interest rates. "As for whether the economy can sustain itself, it's another matter. Perhaps a recession is needed, otherwise inflation cannot quickly fall to 2%
Bob Schwartz, a senior economist at the Oxford Institute of Economics, previously told First Financial reporters that a slight recession is expected in the US economy. "With high interest rates and tighter loan conditions, economic activity will be affected, and the US gross domestic product (GDP) will lose momentum starting from the fourth quarter," he believes, This is not enough to change the Fed's stance of maintaining interest rates at high levels for an extended period of time, in other words, it will set a high threshold for interest rate cuts, as evidence is needed to show that inflation is sustainably returning to 2%.