As Federal Reserve Chairman Powell stated in his latest speech early Friday morning Beijing time that the Fed is not in a hurry to cut interest rates in a strong economy, this hawkish statement quickly caused a stir in global markets.
After Powell's speech, the US stock market closed near its intraday low, and the US dollar surged along with US bond yields, with the ICE US dollar index hitting its highest level in a year. Traders have lowered their expectations for the probability of the Federal Reserve cutting interest rates in December to around 50% from 80% the day before, which is in stark contrast to the previous day's CPI release.
Powell said in a dialogue with local business leaders hosted by the Dallas Federal Reserve on the same day that "the economy has not sent any signals of the need to urgently lower interest rates, and the better economic conditions enable us to act cautiously when making decisions.
In terms of inflation, Powell pointed out that "the inflation rate is getting closer to our long-term target of 2%, but it has not yet been achieved. We are committed to fulfilling this mission, and with roughly balanced labor market conditions and well anchored inflation expectations, I expect the inflation rate to continue to decline towards the 2% target, albeit with occasional bumps.
In order to combat inflation, the Federal Reserve raised interest rates to their highest level in 20 years last year and then maintained them at that level for over a year to ensure that price pressures do not resurface. Since mid-2023, although inflation in the United States has significantly decreased, the slowdown in price growth has sometimes been uneven, including in the past two months.
Powell reiterated that the Federal Reserve's policy rate path will depend on upcoming data releases and the evolution of the economic outlook, closely monitoring core indicators of inflation in goods and services, excluding housing, which have been declining over the past two years.
The Federal Reserve has cut interest rates in both of its recent meetings, starting with a significant 50 basis point cut in September when there were signs that the labor market may be weakening. At last week's meeting, officials further lowered the benchmark interest rate by 25 basis points to the range of 4.5% -4.75%.
The next meeting of the Federal Reserve will be held on December 17-18. In his latest speech, Powell did not comment on the possibility of a rate cut at the December meeting. However, its related statements clearly still dealt a heavy blow to the market's expectations for next month's interest rate cut. The Federal Reserve observation tool of Zhishang Institute shows that whether the Federal Reserve can achieve three consecutive interest rate cuts next month has once again become a 50-50 matter.
And sharp market traders undoubtedly quickly 'move' upon hearing the wind.
Global market facing 'new storm'
The yields of most maturity US Treasury bonds have risen after Powell's speech overnight, especially the yield of short-term bonds, which quickly surged. The yield of 2-year US Treasury bonds rebounded by 8 basis points to 4.36% at one point.
The major stock indexes in the United States also fell in response. The Dow Jones Industrial Average fell 0.5%. The S&P 500 and Nasdaq both fell 0.6%, marking the largest single day decline of the month.
In the foreign exchange market, the US dollar further strengthened against major currencies on Thursday, with the ICE US dollar index breaking through the 107 mark during trading, setting a new high in a year and rising for the fifth consecutive trading day.
Zachary Griffiths, the head of investment grade and macro strategy at CreditSights in the United States, stated that "Powell's speech leans more towards hawks, and his approach to the future of monetary policy leans towards risk management.
Powell's speech is hawkish, "Neil Dutta, head of economic research at Renaissance Macro Research, also pointed out." I believe they will still cut interest rates in December because interest rate policy is still restrictive and they hope to achieve a neutral rate setting. However, despite this, in terms of the economy, I believe Powell (and the broader consensus) is complacent. The short-term downside risk is greater than people realize.
In fact, even setting aside Powell's hawkish speeches, a series of recent US economic data do not seem to strongly support interest rate cuts. As shown in the following figure, the number of initial jobless claims in the United States has fallen to a six-month low, and inflation data is generally stronger than expected. The economic and inflation situation seems to still face the risk of "no landing".
Murphy& Sylvest market strategist and senior wealth advisor Paul Nolte said that based on the data from the past two days (consumer prices, producer prices, and weekly unemployment claims), Powell is also unlikely to become a super dovish. All information indicates that employment growth remains considerable and inflation continues to exceed the target of 2%.
This also raises a question: if there is really a scenario where "Powell suspends interest rate cuts as soon as Trump takes office" (currently it seems that the Federal Reserve is likely to slow down its easing pace early next year), how angry will Powell, who is unhappy, be?
Michael Feroli, Chief US Economist at JPMorgan, predicts that Powell's speech may imply that the Federal Reserve will slow down its pace of interest rate cuts before March next year. He wrote, 'We still believe that the FOMC may cut interest rates in December.'. But today's speech has opened the door to slowing down the pace of easing as early as January next year