Event Description
Event: On May 1st local time, the Federal Reserve announced that it would keep the federal funds target interest rate range unchanged at 5.25% -5.5%, for the sixth consecutive time, in line with market expectations. Since 2022, the Federal Reserve has raised interest rates 11 times, with a magnitude of 525BP.
1、 Powell still maintains a "dove leaning" stance
The main changes in the statement from the Federal Reserve's May 2024 interest rate meeting compared to March are as follows: (1) indicating a lack of further progress in achieving the 2% inflation target (a lake of further progress); (2) Change "the risk of achieving employment and inflation goals is moving into a better balance" to only "have moved towards a better balance of employment and inflation goals over the past year", which also points to the recent stagnation of the "disinflation" process; (3) Announced the plan to slow down the scale reduction, "starting from June, the ceiling of monthly redemption of US treasury bond will be reduced from US $60 billion to US $25 billion, the ceiling of redemption of institutional bonds and institutional mortgage-backed securities will remain unchanged, and any principal exceeding this ceiling will be used for reinvestment in US treasury bond".
Overall, Powell continued the dovish stance of the March meeting. Firstly, regarding the inflation aspect that the market is more concerned about, Powell changed his attitude of "downplaying inflation risks" from the previous meeting at the press conference, acknowledging that consecutive quarters of higher than expected inflation data have attracted the attention of the Federal Reserve. This is consistent with the statement in the meeting statement that "inflation lacks further progress", but he still expects that a slowdown in rental prices will lead to a downward trend in inflation within the year. Secondly, in terms of the labor market, following the last meeting, Powell reiterated that wages are not the focus of the Federal Reserve's dual goals and are expected to continue to slow down; And more inclined to focus on the job market, ready to respond to any weak situation in the labor market at any time. Finally, in his assessment of economic growth, Powell directly denied market discussions about "stagflation" and was not concerned that the current economy would enter stagflation. Therefore, at the most important level of guiding the path of monetary policy, Powell may be trying to convey the message that "interest rate cuts will eventually come, but they may come later, and it is basically impossible to raise interest rates again."; At the same time, it provides three scenarios for whether to cut interest rates: (1) "hold off rate cuts" if inflation resilience+hot employment+good economy; Either (2) "downward inflation" or (3) "weak employment" will result in a rate cut. Summing up the important incremental information mentioned above, Powell did not turn to the hawkish side as expected by the market at the press conference, continuing the previous tendency of being more accommodative. At the same time, based on our assessment of the US economy, the actual GDP growth rate in Q1 was much lower than market expectations, and the capacity utilization rate tended to decline. The core CPI and core PCE remained in a downward trend year-on-year; We maintain the view that the Federal Reserve will continue to lean towards a "dovish" stance in the second quarter and is likely to cut interest rates before the end of the third quarter, as the number of layoffs in the United States continues to reach new highs, full-time to part-time transfers, and salary growth weakens. In fact, based on the newly released employment data prior to this meeting, the cooling trend in the US labor market remains unchanged. In March, the number of JOLTS job vacancies decreased to 8.488 million, and the voluntary turnover rate decreased to 2.1% (due to a decrease in labor market liquidity), reaching new lows since February 2021 and August 2020, respectively.
2、 Suggestions for major category configurations
（1） Gold: Seizing opportunities for bargain hunting allocation may go higher and further than market expectations. The important driving factors for further price increases in the future may come from the decline in real interest rates. At the same time, factors such as geopolitical risks and de dollarization driving central bank demand for gold may still provide support for gold prices; （2） US bonds: have allocation value in the medium to long term. Based on the judgment of the future slowdown of the US economy and the Federal Reserve's interest rate cut, the current ten-year US bond interest rate of around 4.7% is attractive for allocation; （3） Medicine, especially innovative drugs: Waiting for the expected increase in interest rate cuts will benefit from the easing of denominator pressure brought about by the Federal Reserve's monetary shift.
4、 Risk warning
The risk of a second rebound in US inflation has once again led the Federal Reserve to raise interest rates more than expected.
Chart 1: The Federal Reserve has cumulatively raised interest rates by 525BP since 2022
Chart 2: There has been a certain stagnation in the process of "de inflation" in recent times
Chart 3: The latest data points to a consistent cooling trend in the labor market
Chart 4: Implied Interest Rate Paths in Federal Fund Futures (Unit:%)