On October 11, local time, the Federal Reserve released the minutes of the Federal Open Market Committee (FOMC) meeting on September 19 to 20, showing that there are certain differences among Federal Reserve officials on the future monetary policy. Officials at the meeting agreed to base future monetary policy decisions on incoming data, rather than prefiguring any policy path.
The Fed is divided over whether to continue raising rates
Snow Snow, an analyst at Oriental Jincheng Research and Development, told Shell Finance that the minutes of the September meeting showed that there were large differences within the Federal Reserve on whether the need for a "last plus" : most participants thought it would be appropriate to add one more at a future meeting, while some members believed that there was no need to raise interest rates again. This reflects that at the end of the rate hike, the Fed's difficulty in balancing "too much tightening" and "not enough tightening" is increasing, especially at a time when US inflation has not fallen as much as expected, while economic and employment data still show some resilience.
Second, in this minutes, the Fed in addition to "keep interest rates higher for longer" there are some differences, mainly because some officials said that the need to pay close attention to the movement of real interest rates, because as inflation falls and the policy rate is unchanged, the real interest rate itself will gradually rise over time. But overall, the Fed is still avoiding expectations of a prolonged period of inflation, and the consensus that inflation may fall back to the 2% target for a longer period of time, indicating that high interest rates remain the consensus of the Fed for a longer period of time, and the likelihood of a rate cut in the short term is small.
Wu Dan, a researcher at the Research Institute of the Bank of China, told Shell Finance that the minutes of the Federal Reserve's interest rate meeting once again attracted the market's attention to the process of raising interest rates in the United States, and successfully guided the market's judgment and expectation on whether the Federal Reserve would raise interest rates in November and whether it would suspend interest rate cuts after November.
On the one hand, there are views that the Fed's attitude shown in the minutes is neutral, and more than 60% of the Fed officials expect to raise interest rates once more this year, which is basically in line with previous market forecasts. On the other hand, as the minutes showed Fed officials' median interest rate forecast for next year and two years increased by 50 basis points, the market also raised concerns about rising uncertainty.
Gf Securities macroeconomic team believes that in general, the September interest rate minutes and the meeting statement conveyed a similar message, that is, the Federal Reserve is close to the end of interest rate hikes, and whether there is a subsequent interest rate hike needs to be data dependent.
The key takeaways from the minutes are three: First, almost all Fed officials at the September meeting thought the current level of the federal funds rate was reasonable, but were divided on whether there was still a decision to raise the federal funds rate: most participants supported one more increase, and some participants saw no need for further tightening.
Second, Fed officials' focus has shifted from how much to raise rates to how long they are likely to stay high; Third, Federal Reserve officials believe that monetary policy has reached a restrictive level, the risk of raising interest rates too much or not enough is relatively balanced at this stage, and the Federal Reserve will move forward cautiously.
In addition, the minutes showed that the Fed's judgment on inflation was optimistic. Fed officials acknowledged the cooling in inflation and said they needed to see more data to show it was moving back toward their 2 percent target. The Fed is still avoiding expectations of prolonged inflation; But in the forecast timeline, the 2 percent inflation target has a longer time line.
The probability that the Fed will pause interest rate hikes in November has increased
Snow noted that the context of the September meeting minutes was before the big moves in the Treasury market in recent weeks. In the context of the recent sharp and rapid rise in mid - and long-term US bond interest rates, the likelihood of further interest rate hikes by the Federal Reserve in November is decreasing. This is mainly because the tightening of financial conditions brought about by the rise in US bond interest rates will play a certain role in the replacement of interest rate hikes, which will make the Federal Reserve's interest rate hike action more cautious. Recent comments from a number of Fed officials point to the central bank being in a wait-and-see position.
The CME's FedWatch tool shows the market pricing in an 89.2 per cent chance that the Fed will hold rates steady at 5.25 per cent to 5.50 per cent in November and a 10.8 per cent chance that it will raise rates by 25 basis points to 5.50 per cent to 5.75 per cent. The probability of keeping rates unchanged by December is 72.9%, the cumulative probability of a 25 basis point hike is 25.2%, and the cumulative probability of a 50 basis point hike is 2.0%.
U Thant believes that despite the steep rate hike process, the US economy has shown strong resilience, and the US dollar index has ushered in a rebound. Downside risks remain significant in most other global economies, and persistently high interest rates in the United States have led to global currency exchange rates, asset price volatility, and a range of debt risks.
From an objective point of view, the United States is the beneficiary of this aggressive interest rate hike cycle, while all countries are more or less affected by the high interest rates of US bonds. Although there is a high probability that the United States will end the interest rate hike cycle and start the interest rate cut process next year, it is clear that the repeated controversy over the topic of interest rate hikes is fighting for more good news for the United States. Therefore, after the meeting minutes release signals to the market about the process of the interest rate hike cycle, the dollar is expected to maintain an upward cycle for some time.