With two weeks left until the last interest rate meeting of the year, there has been a fluctuation in the market's pricing expectations for the Federal Reserve's policy. Although some officials still verbally insist on a cautious stance, the market has sensed some signals from the statements of several heavyweight commissioners, and the US dollar and bond yields have fallen in response.
On Thursday (10th), the United States will release a key inflation report, which may further strengthen expectations for the end point of interest rate hikes. The subsequent speech by Federal Reserve Chairman Powell will be the biggest focus.
Can the suspense over the end point of interest rate hikes be revealed
The federal funds rate futures show that the expectation of a rate cut in May has skyrocketed from nearly 50% last week to nearly 80%. Affected by this, the yield of two-year US treasury bond hit a four month low, the yield of 10-year treasury bond fell more than 75 basis points from the year's high, the US dollar index fell to a new low since August, and the international gold price index reached a new record high.
The latest statement by Federal Reserve Governor Waller this week is seen by the outside world as one of the clearest signals sent by the Fed's top management so far, that the nearly 20 month tightening cycle will reach its end.
As a hawkish representative within the Federal Reserve, Waller's voice is highly influential and is considered to be close to the stance of Federal Reserve Chairman Powell. He stated that the economy may be in a weak process sufficient to reduce inflation. "I increasingly believe that current policies can effectively slow down economic growth and restore the inflation rate to 2%," he said. "If inflation continues to decline, there is no reason to insist on keeping interest rates so high.".
His views were also agreed upon by New York Fed Chairman Williams, who, as an important ally of Powell and the Fed's "number three figure," believed that long-term inflation expectations were stable and reassuring.
The market's expectation of interest rate cuts quickly heated up, to the extent that the voices of the two hawkish commissioners were drowned out in optimistic emotions. Federal Reserve Director Bauman believes that the progress made in slowing down the economy and controlling inflation is not balanced. She still expects that the Federal Reserve needs to further raise the federal funds rate to curb inflation. Richmond Fed Chairman Barkin expressed skepticism about whether inflation can smoothly return to the target of 2%. He believes that inflation will be more stubborn than he hopes, and the statement about interest rate cuts is too early.
Craig Erlam, senior market analyst at Oanda, said in an interview with First Financial reporters that he was slightly surprised by Waller's position, which may be one of the signals that the Federal Reserve will start discussing interest rate cuts internally. Of course, it depends on whether inflation can smoothly move towards the 2% target. It may seem too early at the moment, but if the trend continues, perhaps the policy turning point will not be far away.
On Thursday local time, the United States will release October PCE data. As the inflation indicator that the Federal Reserve is most concerned about, benefiting from the decline in energy prices, institutions predict that the overall PCE growth rate last month will further decrease to 3.5%. Without considering energy and food, the core PCE growth rate may fall below 4%, and is expected to break a new low in at least two and a half years.
Investors have turned their attention to Powell's subsequent remarks, whether the Federal Reserve Chairman will change his slightly hawkish stance at the International Monetary Fund (IMF), and whether there will be a change in the two-way nature of policy risk, all of which may have subtle impacts on the future policy path.
Can soft landing be achieved
According to updated data from the US Department of Commerce, the GDP growth rate in the third quarter has increased from 4.9% to 5.2%. However, with the recent loosening of the labor market and fluctuations in economic data, the cooling of US business activity is inevitable. The latest forecast from the Atlanta Federal Reserve shows that GDP growth in the fourth quarter will drop to 2.1%.
The latest economic report released by the Federal Reserve, the Brown Book, also shows that the US economy has slowed down in recent weeks, and the economic outlook for the next 6 to 12 months has declined.
Erram told First Financial that as consumer spending is increasingly constrained by factors, the US economy is returning to a normal track, and the speed of future inflation slowdown depends on the economy. The potential risk is that economic resilience leads to a slowdown in the anti inflation process, allowing the Federal Reserve to continue maintaining interest rates at temporary high levels.
Recently, Wall Street has once again raised concerns about the Federal Reserve's policy mistakes. Jamie Dimon, CEO of JPMorgan Chase, stated on the 9th that he has higher concerns than the outside world about the possibility of the US economy avoiding a recession. Damon compares the economy to "weather", and people always make mistakes about future development.
Hedge fund manager and founder and CEO of Pershing Plaza Capital Management, Bill Ackman, believes that the Federal Reserve needs to complete the rate hike cycle as soon as possible and prepare for a rate cut. "The market is expected to arrive at some point in the middle of next year. I think the earliest possible time is in the first quarter."
Ackerman said that economic weakness may require the Federal Reserve to take action earlier. "We have seen evidence of this in some industries... I have some concerns," he explained. The Federal Reserve is sticking to a 5% interest rate range, and inflation is gradually falling below 3%, which will mean real interest rates are very high. "I think this has had a hindering effect on the economy. If the Federal Reserve doesn't start cutting interest rates soon, there is a risk of a hard landing. Look at what happens when people have to reprice debt, which could have some kind of cliff like impact. You will definitely see this situation in real estate."