The Federal Reserve ended its two-day monetary policy meeting on January 31st, announcing that the target range for the federal funds rate would remain unchanged between 5.25% and 5.5%, and hinted that there would be no rate cuts for the time being.
This is the fourth consecutive time that the Federal Reserve has maintained this interest rate range unchanged.
The Federal Reserve maintains interest rates unchanged, Federal Reserve Chairman: unlikely to cut rates in March
The Federal Reserve statement shows that the committee believes that interest rates will not be lowered until there is more confidence that inflation is approaching 2%, and reiterated that inflation has eased in the past year but remains at a high level. However, the statement removed the relevant wording of "possible further tightening of policies".
Federal Reserve Chairman Powell stated at a press conference held after the meeting that the federal funds rate is likely to be at the peak of this tightening cycle. If the economic development is generally in line with expectations, the Federal Reserve will begin to adjust policy intensity. But he also stated that according to this meeting, the Federal Open Market Committee "is unlikely to reach confidence levels in March and has determined that March is the time to take action (interest rate cuts).".
Most Federal Reserve officials predicted at the end of last year that if inflation rates continue to gradually decline and the economy grows steadily, the Federal Reserve may lower interest rates three times in 2024, each by 25 basis points.
What signals are revealed by the Federal Reserve
CITIC Securities pointed out that the statement made by the Federal Reserve at this meeting has undergone significant changes, indicating that the Federal Reserve's policy stance may have been adjusted. Powell's speech was generally hawkish and did not believe that the March interest rate cut was a benchmark scenario.
According to a research report by China International Capital Corporation (CICC), the Federal Reserve's January meeting maintained policy interest rates unchanged, which is in line with expectations. The core message conveyed by the Federal Reserve this time is that it will cut interest rates but does not want market expectations to be too early. The monetary policy statement suggests that officials still lack confidence in inflation returning to the 2% target, and therefore hope to retain their options rather than rushing to cut interest rates in March. The recent strong economic data and supply chain risks caused by the interruption of Red Sea shipping are the main reasons why the Federal Reserve has become more cautious. If the economic foundation is still strong and supply risks have not been completely relieved, then the risk of inflationary pressure resurgence cannot be ignored.
Founder Securities pointed out that compared to December last year, the changes in the January statement are mainly reflected in: strengthening confidence in the economic soft landing, and believing that employment& The inflation target is moving towards a better balance; Further confirm the policy shift and change the description of policy interest rates from incremental policy tightening to adjustments; Due to the weakening of restrictive policies, the statement also removed the description of the impact of tightening financial conditions on the real economy; The wording of future policies is neutral rather than dovish (using adjustments rather than cuts), as it believes that interest rate cuts should be made after there is greater confidence in seeing inflation stabilize and fall back to 2%.
When to cut interest rates
Founder Securities pointed out that in the short term, the final decision to cut interest rates in March will still depend on whether the non-agricultural data facing annual adjustments in January will experience marginal deterioration.
Huatai Securities pointed out that the Federal Reserve is open to the next decision, but the probability of a rate cut in March has decreased, while the probability of a rate cut in May has increased. According to Powell's statement, under the benchmark scenario, the Federal Reserve may cut interest rates for the first time in May. However, if the two inflation and employment reports before the March meeting are significantly lower than expected, the possibility of a rate cut in March cannot be ruled out. In terms of balance sheet reduction, the March meeting of the Federal Reserve will discuss in detail the issues related to balance sheet reduction. The Federal Reserve may announce a debt reduction plan (Taper) in the middle of the year, which will be divided into multiple steps, but aims to achieve "minimization" of balance sheet size without affecting financial stability.
CICC stated that the expected benchmark scenario is still that the Federal Reserve may cut interest rates in the second quarter, but the magnitude of the annual rate cut may not be as much as market predictions.
CITIC Securities pointed out that the current round of interest rate hikes by the Federal Reserve has ended, and the first rate cut may occur around the middle of the year. The contraction of the balance sheet may begin to slow down after March, and the contraction will end in the middle to third quarter of the year. However, attention should be paid to the potential disturbance to the policy process caused by the unexpected weakening of the employment market. It is expected that the US dollar index and US bond interest rates will remain volatile. In the short term, the bearish factors for US bonds have basically been implemented, while US stocks need to pay attention to recent financial reports.