Tomorrow morning, we will welcome the Federal Reserve's May interest rate resolution.
From April 30th to May 1st local time, the Federal Reserve held a two-day interest rate meeting. The current interest rate meeting has attracted much attention, and the market is generally concerned about whether the Federal Reserve will release signals related to interest rate cuts. However, this meeting will not release any new economic forecasts. Therefore, the speech by Federal Reserve Chairman Powell after the meeting is particularly important.
The several sets of economic data released before this interest rate meeting are particularly noteworthy.
In the first quarter, the GDP growth rate in the United States was not only lower than expected, but inflation also increased.
On April 25th local time, the official website of the US Department of Commerce revealed that according to estimates, the real gross domestic product (GDP) of the United States in the first quarter of 2024 had an annualized growth rate of 1.6% on a quarter on quarter basis, far below market expectations of 2.5%.
Meanwhile, the PCE data for the first quarter and March in the United States exceeded expectations.
The overall personal consumption expenditure (PCE) price index in the United States increased by 3.4% year-on-year in the first quarter, compared to 1.8% in the fourth quarter of last year. After excluding food and energy prices, the core PCE price index increased by 3.7%, compared to the previous value of 2.0%.
The overall PCE price index in the United States increased by 0.3% month on month and 2.7% year-on-year in March, exceeding market expectations of 2.6%. After excluding food and energy, the core PCE price index increased by 0.3% month on month and 2.8% year-on-year, exceeding market expectations of 2.7%.
There is a high probability that interest rates will remain unchanged in May, and there may be no hope of a rate cut in the first half of the year
Due to lower than expected economic growth and an increase in inflation in the first quarter, the market believes that the timing of the Federal Reserve's interest rate cut this year is more uncertain.
"I had anticipated that the Federal Reserve's meeting in May would remain stagnant until the second half of the year, when economic data would be used to evaluate whether interest rates would be lowered." Hu Jie, a professor at the Shanghai Institute of Advanced Finance at Shanghai Jiao Tong University and former senior economist at the Federal Reserve, analyzed to The Paper that although GDP growth has declined recently, it is still in a good positive range, and inflation rates may fluctuate or even rebound. Therefore, it can be inferred that the Federal Reserve will continue to maintain interest rates unchanged.
Hu Jie stated that since the end of last year, the last mile of inflation rate decline has been very sticky, fluctuating, and the downward trend is extremely unstable. Therefore, it has been judged that the Federal Reserve will only consider lowering interest rates in the second half of the year. Now it seems that although GDP growth has slowed down, it is still in a relatively healthy positive range, so it is unlikely to cut interest rates in the first half of the year. Although it is possible to cut interest rates in the second half of the year, it depends on the economic data released at that time. Based on current trends, it is unlikely that interest rates will be lowered before September.
According to Bai Xue, Senior Vice Director of Research and Development at Dongfang Jincheng, considering the comprehensive rebound in previously announced inflation rates, the results of the May interest rate meeting are no longer uncertain, that is, the Federal Reserve will continue to maintain interest rates unchanged. After the release of first quarter GDP and PCE inflation data, economic resilience will further increase the threshold for future interest rate cuts by the Federal Reserve, which means that the timing of the Fed's interest rate cuts will be further delayed. In fact, the current market generally expects that the Federal Reserve's rate cut may not be until after September, and some Federal Reserve officials are even discussing the possibility of a rate hike.
Bai Xue believes that with the US economy and inflation maintaining resilience beyond expectations, there is basically no motivation or possibility to raise interest rates in the first half of the year. "In the second half of the year, we conclude that implementing interest rate cuts remains the main direction for the Federal Reserve's monetary operations."
Specifically, firstly, it is expected that there is still room for inflation to fall, and the reasons behind this mainly include: the gradual cooling of the labor market is driving wage pressure to ease; The decline in new lease agreements is gradually included in the early stage to alleviate housing inflation pressure; The continuous decline in prices of used and new cars. But more importantly, what may drive the Federal Reserve to cut interest rates in the future is not only a cooling of inflation, but also an economic downturn that may force the Fed to cut interest rates quickly. The data shows that the current nominal interest rate in the United States is not only high, but the actual interest rate after considering price factors is also at a relatively high level of around 2.0%, which has been ongoing for some time. This may have a significant impact on consumption in the second half of the year or later, leading to a significant slowdown or even recession in the US economy. At that time, the Federal Reserve may implement a significant interest rate cut. Overall, there is significant uncertainty regarding the timing of the first interest rate cut, with a high likelihood of starting in the third quarter and a high probability of 1-2 rate cuts within the year.
Will the Federal Reserve release a more hawkish signal this time?
According to foreign media reports, recently, economists at Deutsche Bank wrote in a report that at this week's interest rate meeting, Powell may continue to state that the Federal Reserve's monetary policy stance is restrictive.
Regarding this, Cui Xiao, senior economist at Swiss Baida Wealth Management in the United States, believes that strong domestic demand and upward correction of inflation indicate that the Federal Reserve will adopt a more patient attitude in policy adjustments. At this interest rate meeting, it is expected that the Federal Reserve will adopt a hawkish stance. Federal Reserve Chairman Powell will hint that the data suggests that the time for interest rate cuts will be later and the number of rate cuts will decrease. "We expect that the gradual slowdown in inflation and moderate slowdown in demand will prompt the Federal Reserve to cut interest rates twice this year, but tend to lower rates later and fewer times."
Hu Jie said that from the inflation data, the Federal Reserve will release a more hawkish view in May compared to March. Although the previously released Q1 GDP growth rate was lower than expected, the Federal Reserve is inevitably more concerned about the stickiness of inflation rates, and the dovish view is clearly diminishing.
Bai Xue believes that against the backdrop of continuous rebound in inflation and no obvious signs of economic downturn, the possibility of the Federal Reserve clearly releasing a rate cut signal in May is very low. In fact, based on the recent intensive statements of Federal Reserve officials, the hawkish voices within the Federal Reserve are increasing due to the uncertainty of inflation trends. They generally hold a cautious attitude towards interest rate cuts, believing that the necessity of a significant reduction in interest rates is significantly reduced. In the balance between growth risk and inflation risk, they are also more inclined to believe that premature or significant interest rate cuts cause higher inflation risks.