Big news suddenly spreads from the Federal Reserve.
According to Politico, citing a letter to John William, President of the New York Federal Reserve, and Jerome Powell, President of the Federal Reserve, two Republican senators are investigating recent reports about the New York Federal Reserve's handling of international transactions with Iraq and whether it allowed Iran to evade sanctions. In response, the Federal Reserve Board and the New York Fed stated in a statement that they have received the letter and plan to respond.
At the same time, the market's bets on the prospect of the Federal Reserve cutting interest rates have suddenly undergone significant changes. After the release of the September non farm payroll data in the United States, the market believes that there is a 94% chance that the Federal Reserve will cut interest rates by 25 basis points in November, compared to only 65% before the data was released.
Chicago Federal Reserve Bank President Austin Goolsby said in a recent interview that the latest job market report is "extremely impressive". But he warned not to overly trust one month's data and added that the Federal Reserve's policy rate needs to be significantly lowered in the next 12-18 months.
Explosive material
According to Politico, citing a letter to John William, the President of the New York Federal Reserve, and Jerome Powell, the President of the Federal Reserve, Republican Senators Tim Scott and Mike Lantz are investigating recent reports about the New York Federal Reserve's handling of international transactions in Iraq and whether it allowed Iran to evade sanctions.
Politico reported that two Republican senators have requested information from the Federal Reserve Bank of New York on how it handles Iraqi central bank accounts, following media reports that the bank has failed to implement anti money laundering controls, which could allow Iran to evade US sanctions.
In response, the Federal Reserve Board and the New York Fed stated in a statement that they have received the letter and plan to respond.
In the letter, Republican Senators Tim Scott from South Carolina and Mike Lantz from South Dakota stated that reports indicate that on certain days, 80% of the $250 million wire transfers flowing through Iraqi banks were untraceable. The Wall Street Journal quoted US officials as saying that in early September, some funds flowed into Iran's Islamic Revolutionary Guard Corps and its supported anti American militia groups.
The Wall Street Journal reported that although these allegations are still under investigation, US officials believe that this oversight error may have provided a funding channel for sanctioned entities and terrorist organizations.
In a letter to the New York Fed, senators wrote, "If accurate, this would represent one of the biggest failures of the US financial regulatory system. If these actions were taken by a commercial bank, the bank and its executives could face severe civil and criminal penalties, including permanent closure
Major variables
At present, the market's bets on the prospect of the Federal Reserve cutting interest rates have suddenly undergone significant changes.
On October 4th Eastern Time, data released by the US Bureau of Labor Statistics showed that non farm payroll employment surged by 254000 in September, the largest increase since March 2024, higher than the revised 159000 in August and far exceeding the market's general expectation of 150000. In addition, the unemployment rate dropped to 4.1%, a decrease of 0.1 percentage points, the lowest since June 2024.
After the data was released, futures market investors lowered their predictions that the Federal Reserve would cut interest rates by another 50 basis points at its next policy meeting in November.
The market believes that there is a 94% chance of a 25 basis point interest rate cut, while before the data release, this proportion was only 65%. Moreover, traders' expectations for the combined rate cut of the Federal Reserve's next four meetings are less than 100 basis points.
Michael Feroli, Chief US Economist at JPMorgan, predicts a 25 basis point rate cut in November. He stated that considering the Federal Reserve had already cut interest rates by 50 basis points in September, he believes a robust job market is the reason for the Fed to adopt a more cautious approach.
On October 4th local time, Austin Goolsby, the President of the Federal Reserve Bank of Chicago, stated that the latest job market report is "extremely outstanding" and that more such reports will enhance his confidence in the US economy being at full employment with low inflation rates.
But he warned not to overly trust one month's data and added that there is a risk of inflation falling below the central bank's 2% target.
Gulsby stated in an interview with Bloomberg that based on a wide range of indicators, the job market is cooling down.
Gulsby said that the employment report does not mean that the Federal Reserve does not need to cut interest rates. The policy interest rate of the Federal Reserve is much higher than the final "stability point" that most decision-makers consider, and will need to be significantly lowered in the next 12-18 months.
Gulsby believes that the median estimate of 19 Federal Reserve decision-makers seems "quite reasonable", that is, interest rates will drop to 3.4% by the end of next year and 2.9% by the end of 2026.
He further pointed out that the speed at which the Federal Reserve reaches this interest rate level will depend on economic conditions and whether there will be unexpected factors that may disrupt the economy or inflation, such as the extent to which Middle Eastern turmoil leads to an increase in oil prices. External shocks like this have repeatedly disrupted past soft landings, and we must remain vigilant about these conditions in order to respond, "he said.
When talking about the neutral interest rate, Goolsbee said: "It's hard to say exactly how much it is." "I think it must be higher than the zero interest rate many years before the COVID-19 epidemic."
Federal Reserve officials have been raising their estimates for long-term neutral interest rates. The unadjusted median estimate is currently 2.9%, higher than the pre pandemic forecast of 2.5%. Interest rates can only be estimated and cannot be measured.