News from the Financial Associated Press on December 14 (edited by Xiaoxiang)At 3 o’clock in the morning on Thursday (December 15th), Beijing time, the eyes of the global financial market will undoubtedly focus on the headquarters of the Federal Reserve in Washington again. With the latest summary (SEP) and interest rate dot plot, there will be a press conference in half an hour at 3:30.
This meeting obviously has many special meanings for the Fed itself and the global capital market:In the past nine months, Powell’s Fed has continued to raise interest rates at the fastest pace since the 1980s, triggering a series of sharp losses across markets. The December interest rate meeting at the end of the year is being regarded by many Fed officials and market participants as a potential turning point for the Fed to raise interest rates aggressively.
Before this week’s Fed rate meeting, Nick Timiraos, a well-known reporter known as the “New Fed News Agency”, once divided the Fed’s current tightening cycle into three stages, which may also be the best interpretation of the current market environment:
The first phase refers to the phase in which the Fed raises interest rates rapidly and sharply from zero to fight inflation, which is the scenario that investors have seen in the past few months.Last year, Fed officials headed by Powell generally underestimated inflationary pressures, which forced them to make amends this year – the past four interest rate meetings have announced a 0.75 percentage point increase in interest rates. The last three interest rate hikes have won the unanimous support of members of the Federal Open Market Committee (FOMC).
The second phase is what Fed officials are expected to enter tonight – a slower pace of rate hikes.At the interest rate meeting at the beginning of last month, the Federal Reserve proposed for the first time that when determining the future target interest rate, the committee will consider the cumulative effect of monetary policy and the lagged impact of economic activities and inflation. This is also interpreted by the outside world as a signal that the radical policy is approaching the end .
As for the third phase, it is expected by most Fed officials to appear in the spring or summer of next year.— That is, the Federal Reserve will keep interest rates at a relatively high level that cannot be determined at present, until the inflation rate smoothly falls back to the 2% target.
By understanding the division of these three stages, you may be able to understand the significance of this week’s Fed rate meeting:Tonight’s interest rate meeting will not only be a key transition between the first phase and the second phase, but also likely to reveal how long the second phase of this cycle of interest rate hikes will last and how high the peak interest rate will rise. And whether the Fed really intends to maintain its long-term commitment to Phase 3, thereby extinguishing the market’s current growing expectations of a rate cut next year…
Therefore, in response to tonight’s Fed’s year-end closing interest rate drama, the Financial Associated Press has listed the following core points for investors to refer to before the arrival of this major risk event that may detonate the global market:
What to watch ①: The pace of the Fed’s interest rate hike will be “slowed down” tonight
How much the Fed will raise interest rates tonight is actually the least suspenseful part of this interest rate night – CME Group’s latest Fed Watch tool shows that the Fed announced a 50 basis point rate hike to 4.25%-4.50% at the December meeting The probability is 79.4%, while the probability of raising interest rates by 75 basis points is only 20.6%.
The Fed’s earliest signal that the pace of Fed rate hikes this month will “slow down” was actually in last month’s monetary policy statement. In his last speech before the silent period of this month’s interest rate meeting, Federal Reserve Chairman Powell also reiterated that because the Fed has raised interest rates rapidly, and these measures take time to have an impact on the economy, officials believe that slowing down Information will be available.
In a speech at the Brookings Institution, Powell said at the time that “the time to slow the pace of rate hikes may come as soon as the December meeting.”
For tonight’s report, Boris Schlossberg, macro strategist at BK Asset Management, an asset management agency, pointed out that from the current situation, the Fed is moving along the route set at the November meeting. He believes that this time there will not be a situation similar to the unexpected decision to raise interest rates by 75 basis points in June.
Cao Yubo, a researcher at the Financial Market Department of China Construction Bank Headquarters, also pointed out in an interview with The Paper this week that the current market generally expects that the meeting will raise interest rates by 50 basis points, which is the result of the Fed’s continuous communication with the market. Since the November meeting, a number of Fed officials, including Fed Chairman Powell, have expressed on different occasions that they would consider slowing down the pace of interest rate hikes. This is mainly because inflationary pressures have dropped from high levels, commodity prices and housing rents have all declined to varying degrees, and expectations of economic recession are constantly strengthening.
It is worth mentioning that once the Federal Reserve slows down the rate hike rate to 50 basis points this month tonight, it will mean that it has completely ended the “ultra-high speed” tightening phase of raising interest rates by 75 basis points in four consecutive meetings.Since the first rate hike of 25 basis points in March this year, the Fed has raised interest rates by a total of 375 basis points, and the rate of increase in the benchmark interest rate is the fastest since the “Volcker era” in the early 1980s.
Aspect ②: How will the Fed raise interest rates in February next year?
Since the Federal Reserve will probably slow down the rate hike rate to 50 basis points this month, new suspense will undoubtedly arise from this: Will the Fed continue to “step on the brakes” in the next Fed meeting? Interest rate meeting, that is, at the interest rate meeting in early February next year, how much will the Fed raise interest rates?
The first interest rate meeting next year will be held from 1/31-2/1 local time. After the meeting in the afternoon of February 1, the Fed will release a meeting statement, and Powell will also hold a press conference as usual.
Speculation in this regard has actually been completely ignited after the lower-than-expected US November CPI data was released last night.
From the pricing of interest rate swaps, we can see that after the release of the CPI data last night, the market’s expectations for a 50 basis point interest rate hike by the Fed tonight have hardly changed, butBets on a further slowdown in rate hikes to 25 basis points in February have surged: The probability that the Federal Reserve will raise interest rates by 50 basis points or more at its February meeting next year is only about 30%.
“I was expecting a 50 basis point hike in February, but now it looks like dovish officials are pushing hard for a 25 basis point hike, after the CPI data,” said Aneta Markowska, chief financial economist at Jefferies in New York. They definitely have a stronger case.”
Brett Ryan, senior U.S. economist at Deutsche Bank, also pointed out that “today’s CPI data makes it easier for the Fed to cut interest rates to 25 basis points at the February meeting, but it may not affect the Fed’s assessment of the overall inflation environment. The easing of conditions runs counter to their goal of achieving a balance between supply and demand.”
In tonight’s interest rate decision, investors can continue to look for clues on the interest rate guidance for the next meeting from the Federal Reserve’s monetary statement on the one hand, and on the other hand, they also need to pay close attention to the press conference after the Fed Chairman Powell’s meeting. Asked about his views on the magnitude of the next rate hike.
Aspect ③: What will be the peak of this round of interest rate hike cycle?
Since the second half of this year, market speculation about the peak interest rate of the Fed’s current tightening cycle has hardly been interrupted. And this will obviously be a highlight of the Fed’s decision tonight.
In his final speech before the meeting’s quiet period, Fed Powell said, “Given the progress we have made in tightening policy, it is more important to think about the timing of a slower pace of rate hikes how much, and how long it needs to remain at restrictive levels to keep inflation under control.”
In terms of forecasts for the peak of interest rates, Powell said at the time that the peak of interest rates may be “a little bit higher” than officials estimated in September. %.
Currently in the market, Goldman Sachs is one of the investment banks with the highest forecast for the Fed’s interest rate peak next year. Goldman Sachs chief economist Jan Hatzius said recently that investors should be prepared for the Fed to let interest rates continue to climb until May 2023, without giving any hint of a policy inflection point. He expects the Fed to raise interest rates by 25 basis points in a row in February, March and May next year, which indicates that the terminal interest rate will come to 5.0%-5.25%, and then the interest rate will remain unchanged until 2024.
In addition to Goldman Sachs, Deutsche Bank, Wells Fargo and Barclays have also recently predicted that the Fed will raise the peak interest rate above 5%. However, it should be pointed out that the forecasts of these investment banks are released before the release of the CPI data on Tuesday, so they will be slightly outdated.
In terms of the latest pricing in the interest rate swap market,Tuesday’s CPI data has prompted interest rate swap traders to expect policy rates to peak at 4.83% next year,That’s down from about 4.99% before the release, which means the Fed will only make two 25 basis point rate hikes next year at most.
Aspect ④: Will the Fed dispel the market’s expectation of a rate cut next year?
In point ③ the introduction of the Fed’s interest rate peak next year, we did not specifically mention the December interest rate dot plot, which may be the most watched by the market tonight, because we believe that this aspect may need to be carried out separately to prevent investors from I fell into a misunderstanding when interpreting the content of the resolution tonight.
In some recent agency forecasts, the interest rate forecast for the end of 2023 in the Fed’s dot plot is basically equated with the peak interest rate next year. But in fact, these are two concepts.In the interest rate dot plot in September this year, the median forecast of Fed officials for the interest rate at the end of next year is 4.6%. At that time and even now, the reason why it can be regarded as the peak interest rate of this round of interest rate hike cycle is actually There is a precondition – and that is that the Fed does not cut interest rates next year…
However, the current pricing in the interest rate market is actually quite interesting:Traders expect the Fed to cut its benchmark interest rate to around 4.35% by December 2023 – the equivalent of a rate cut of around 50 basis points in the second half of 2023 after raising rates to a peak of around 4.83% in the first half of next year!
What does this mean?This means that, as shown in the chart below, the Fed will be more hawkish than the market is pricing in now if it does not raise its interest rate forecast for the end of next year from the previous 4.6%…
This is actually a very “scary” thing-because the “gap” between the market’s interest rate pricing and the Fed’s statement is too great. In fact, at present, including Fed officials and major investment banking institutions, they basically expect that the interest rate forecast for next year in the interest rate dot plot tonight will further increase, and this will only further widen the gap between the dot plot and market forecasts !
Many Fed officials in the tightening camp have long worried that if the central bank started cutting rates too soon, it could repeat the stop-and-go tightening of the 1970s. This has also led to few Fed officials so far clearly signaling support for cutting interest rates next year. The reason why the market continues to go against the Fed’s “will” and think that it will cut interest rates in the second half of next year is to bet on the prospect of a high probability of the United States falling into an economic recession next year, which may force the Fed to turn around.
And tonight, this may be the most important game point between the Fed and market expectations:Either the Fed compromises with the market’s interest rate cut expectations, or it may extinguish the market’s hopes of interest rate cuts. Only one of the two types of expectations will “survive”!
Aspect ⑤: How does Powell view the peaking trend of inflation?
The Fed has made prices a key focus of its monetary policy this year, as persistently high inflation is more damaging to the economy and the labor market.At this meeting, the Fed will also update the Summary of Economic Projections (SEP), which includes the latest outlook on the economy, inflation and employment. Given that the U.S. CPI data for November released last night had just dropped more than expected, Federal Reserve Chairman Powell’s views on the future direction of inflation tonight will obviously attract much attention.
The Labor Department’s report on Tuesday showed headline CPI rose 0.1% month-on-month and 7.1% year-on-year, a new low for the year, as falling energy prices helped offset rising food prices. The consumer price index (CPI), which excludes food and energy, rose 0.2% month-on-month and climbed 6% year-on-year.
This is the last CPI report for 2022. Although U.S. inflation is still too high according to the data, the price increase is clearly slowing down. At present, the year-on-year increase in CPI in the United States has fallen for five consecutive months. Omair Sharif, founder of Inflation Insights LLC, believes in a report that this is obviously not an outlier. In fact, Tuesday’s report showed a fairly broad slowdown in U.S. price growth.
Of course, in terms of trends in inflation itself, the focus has now shifted increasingly to core services to judge overall inflation, given that economists generally expect core commodity inflation to continue to moderate and residential price indices to eventually turn next year. The path of price pressure. Fed Chairman Jerome Powell also singled out the core services sector, which excludes housing from the inflation data, in speeches earlier this month, saying it was “probably the most important category for understanding the evolution of core inflation going forward.” The inflation in the core service sector in the CPI last night was actually still relatively high.
therefore,Powell’s attitude towards last night’s inflation data tonight will show a more positive side, or will he still believe that the road to cooling inflation has a long way to go, and will also indirectly express his hawk-dove stance on the future.
“We can still see a lot of signs of a pullback in inflation, but the question is does that get inflation back to 3%? How do we get it from 3% to 2%,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. That’s the part that I think is more difficult.”
Historically, the Fed’s tightening cycle has tended to keep raising interest rates until the interest rate is higher than the CPI.At present, the Fed is getting closer to this goal, but it is still difficult to achieve this in the next few months!
Point ⑥: Will the economic recession come next year?
In the interpretation of the last quarterly meeting on interest rates in September this year, we mentioned the most important figure in the resolution at that time – 4.4%. This figure was mentioned in two main places at the time. One is the Fed’s interest rate forecast for the end of this year (it will be realized after raising interest rates by 50 basis points tonight); the other is the unemployment rate forecast for the end of next year. We believed at the time that this sharp upward revision to the unemployment rate forecast would signal that the Fed had anticipated a major hit to the labor market by then and a possible recession risk for the economy.
And according to the latest market pricing, Fed officials are set to raise their unemployment rate forecast for 2023 for the third time in a row tonight, as their actions to fight inflation are increasingly likely to push the U.S. economy into recession…
Economists polled by the media expect the unemployment rate to rise to 4.6% by the end of 2023 in quarterly forecasts released by Fed officials on Wednesday. That could mean an additional 1.5 million Americans are out of work compared to now. Unemployment has risen like this without the U.S. economy falling into recession, which has never happened before.
Most private forecasters now expect the U.S. to fall into recession next year, and even Fed economists warned in the minutes of last month’s rate-setting meeting that the probability of such an outcome is about 50-50.
The minutes of the Fed’s November meeting stated that “sluggish real spending growth in the domestic private sector, a deteriorating global outlook and tightening financial conditions are considered to pose prominent downside risks to the forecast for real economic activity; furthermore, continued declines in inflation may require financial The possibility that conditions tighten more than expected is also seen as a downside risk.”
Julia Coronado, president of MacroPolicy Perspectives in Austin, Texas, said, “If you were the Fed, you would want to communicate a commitment to take the necessary actions to address inflation. The focus is still on bringing inflation down, and at least one part of that is A more balanced labor market, and possibly even an increase in outright unemployment.”
There is no doubt that Federal Reserve Chairman Powell may also be asked about his views on the outlook for next year’s economic recession at the press conference after tonight’s meeting, and investors can pay close attention to this.
Summarize
Overall, although the positive U.S. CPI data released last night further magnified the dawn of U.S. inflation peaking, does this really indicate that the Fed will completely turn dovish at the meeting on interest rates a day later? is an unknown.
What investors need to pay attention to tonight is the Federal Reserve’s attitude towards the path of monetary policy next year, especially whether it will hit the market’s bets on interest rate cuts in the second half of next year.
Brent Donnelly, president of Spectra Markets, said, “Tuesday’s CPI data clearly showed a downward trend in US inflation, but the Fed may be more concerned about where the lowest inflation can go. Therefore, although the trend is gratifying, the Fed will not want to repeat the mistakes of the 1970s , they dare not take their foot off the brake pad too soon.”
The CICC Research Report believes that it is expected that the Fed will still raise interest rates by 50 basis points at the December interest rate meeting, but emphasizes that it will “wait” at the restrictive interest rate level, and it is still too early to discuss interest rate cuts.
According to the report, the market has basically priced in the Fed’s slowdown in raising interest rates, and the next thing to pay attention to is the final height of the Fed’s rate hike and the length of time that interest rates will stay at a high level. If service inflation is difficult to fall quickly and US interest rates remain high, the US economy will still face downward pressure. If inflation cannot be resolved before the economic downturn and even recession, it will still be negative for risk assets.