Special topicKrashkartThe Fed keeps its benchmark interest rate unchanged and slows down the pace of table contraction from June.
Author: investment promotion macro
Event
From April 30 to May 1, 2024, the Federal Reserve held an interest rate meeting to keep the federal funds target rate at 5.Krashkart.25% Mutual 5Krashkart.50% range, in line with market expectations. It was announced that from June 1, the rate of reduction of US Treasury holdings will slow from the current US $60 billion / month to US $25 billion / month, while the ceiling of agency debt and MBS reduction will remain unchanged at US $35 billion / month.
Core viewpoints
The Federal Reserve continued to keep its policy interest rate unchanged, and officials announced that it would slow down. Compared with the previous March meeting statement, the May FOMC statement added two new statements: "there has been a lack of further progress in meeting the committee's 2 per cent inflation target in recent months" and "the risk of achieving the employment and inflation targets in the past year has tended to be better balanced". It also announced that it would slow the pace of monthly Treasury holdings from June. Powell said in his speech that slowing down the shrinking table is not loose, nor does it mean that the total amount of the final shrinking table will be smaller than expected.KrashkartTo ensure a smooth transition more gradually. The FOMC meeting in March has hinted that a slowdown will be discussed this time, so the June slowdown is basically in line with expectations. It is expected that it will be difficult to push for a rate cut before the end of the contraction.
Powell stressed in his speech that he would wait patiently for inflation to return to 2%, that he would not raise interest rates, and that there was no timetable for interest rate cuts for the time being.
1) it will take longer to gain confidence in inflation. Since the beginning of this year, there has been a lack of progress in inflation. Powell said in a reporter's question and answer that he would not be satisfied with the inflation rate of 3% and would gradually restore the inflation rate to 2%. When asked about his outlook for future inflation progress, Powell said, "my expectation is that inflation will fall this year, but my confidence has decreased." 2) the labour market is still relatively strong, denying stagflation. The labor market continues to balance, with the latest JOLTS data showing that resignation and recruitment rates have returned to normal. Demand for labour has cooled but remains strong. With regard to the theory of stagflation, Powell said that the United States is still at a very healthy level of growth and has not seen stagflation. 3) it is appropriate to postpone the rate cut without considering further interest rate increases. In the reporter's question and answer session, Powell made it clear that it is unlikely to raise interest rates next time, and will raise interest rates only if the current restrictions are not strong enough to bring inflation back to 2%, but there is no evidence of this at present. The labour market remains strong, but inflation is moving sideways and it may be appropriate to postpone interest rate cuts. Powell pointed out that two paths would make the Fed consider cutting interest rates, increase confidence in inflation back to 2%, or unexpectedly weaken the labor market. Powell said that the rise in the unemployment rate above 4% can be regarded as an unexpected weakness, but the rise in the unemployment rate must be meaningful before the Fed will act.
Market reaction: after the announcement of the FOMC policy decision, 2Y and 10Y US bonds fell 9BP and 7BP, respectively. Powell rebounded slightly after Powell spoke, and 10Y US bonds fell 6BP to 4.63% throughout the day. The s & p 500 rose 1.4% an hour after the policy decision was announced, then fell, closing down 0.34% for the day. Market interest rate cuts are expected to rise slightly, with little change. The probability of the first rate cut rose from 22.7% to 26.0% in July, from 40.5% to 42.6% in September, and 42.9% in November is still the highest probability scenario.
We maintain the judgment that it is difficult to cut interest rates before the election. On the one hand, the United States currently belongs to atypical stagflation, the economy is still resilient, and inflation is a top priority. The initial annual rate of quarterly GDP adjustment in the United States in the first quarter is 1.6%, which is much lower than expected and the previous value. If changed to the year-on-year standard, the actual GDP of Q1 is 2.97% compared with the same period last year, although lower than the previous value of 3.13%, but the second highest since Q2 in 2022. Powell also pointed out in his speech that private domestic final purchases (excluding inventory investment, government spending and net exports) Q1 grew by 3.1% and remained strong. The higher-than-expected US ADP employment in April and the faster-than-expected growth rate of the US Q1 labor employment cost index released this week also point to inflation as a top priority.
On the other hand, with reference to the siphon effect of US stocks from 1998 to 2000, after the outbreak of the Asian financial crisis, the economic growth and asset performance of the United States outperformed others, coupled with the technological progress of the Internet industry in the United States, foreign investors continued to buy a large number of US stocks, while US stocks continued to rise at the stage of raising interest rates and maintaining high interest rates. on the contrary, interest rate cuts confirmed the deterioration of the US economy, leading to the withdrawal of group funds and the decline of US stocks. Not cutting interest rates before the election can also maintain the current siphon effect of US stocks. But looking back, the US economy will gradually enter a weak state in 2025 after the election. behind the US economic prosperity in these two years is a sharp increase in fiscal pressure. in the face of huge fiscal pressure, the United States is likely to gradually enter the cycle of interest rate cuts.
What is the impact on all kinds of assets? Us Treasuries: it is difficult to cut interest rates before the election, US Treasuries remain high and volatile, and Q2-Q3 10-year Treasuries may touch another 4.8% Rue 5.0% range. Us stocks: if US bonds rise further in the short term, it may put downward pressure on US stocks; but after the short-term pressure is over, US stocks are expected to continue to rise and do not rule out hitting new highs before the election. Looking back, the interest rate cut or the inflection point of the siphon effect of US stocks.