The Federal Reserve seems to be about to launch a new round of expectation management!
According to the latest news from Reuters, the Federal Reserve may remove the description of "high inflation" at next week's policy meeting. Analysts believe that if this is the case, it would be the strongest signal so far that the central bank plans to cut interest rates as early as September and begin the easing phase of its monetary policy cycle, which investors now consider almost certain. Last night, the US stock market also rebounded significantly as a result.
At the same time, former Kansas City Federal Reserve Bank President Esther George said that the Fed is starting to see signals of the rate cuts they have been looking for. Richard Clarida, who served as Vice Chairman of the Federal Reserve from 2018 to 2022, also stated that it is "indeed possible" to cut interest rates three times this year as inflation declines and the labor market cools.
However, not long ago, Federal Reserve Chairman Jay Powell and his colleagues stated that they needed concrete evidence to prove that the inflation rate, which had been hovering at a 40 year high, was falling back to the Fed's 2% target. Prior to this, the Federal Open Market Committee will lack the confidence needed to begin lowering interest rates. Trump, who is expected to be re elected as president, also expressed last week that he hopes the Federal Reserve will not cut interest rates before the November election is decided.
Rumors about the Federal Reserve
This morning, there were two major rumors circulating in the market about the Federal Reserve: one is that in the upcoming monetary meeting, the Federal Reserve will remove the description of "high inflation"; Secondly, former executives of the Federal Reserve have repeatedly expressed concerns that interest rate cuts may be necessary.
In September 2021, after the inflation rate exceeded the Fed's 2% target for three consecutive months, Fed staff and decision-makers changed their passive attitude towards inflation and began using the term "elevated" to describe it. In May, June, and July of that year, the Federal Reserve only described high inflation after the personal consumption expenditure (PCE) price index, which is used to set inflation targets, rose by more than 4%. Although the PCE price index has dropped to 2.6% and appears to be still declining, this description is still retained in the policy statement of the Federal Open Market Committee (FOMC) responsible for setting interest rates.
The Federal Reserve's policy meeting next week may ultimately remove this description. If that's the case, it would be the strongest signal so far that the central bank plans to cut interest rates as early as September and embark on a loose phase of its monetary policy cycle, with investors currently believing that a September rate cut is almost certain. However, there are also opinions that adjusting the description of inflation from high to more moderate terms may lead the Federal Reserve to revise another key sentence in its current policy statement: it will not cut interest rates until officials have "more confidence in the continued move towards 2% inflation rate".
In addition, Richard Clarida, who served as Vice Chairman of the US Central Bank from 2018 to 2022, stated that the Federal Reserve may cut interest rates three times this year as inflation declines and the labor market cools. Clarida, the current global economic advisor to asset management giant Pimco, stated in an interview in Hong Kong that further improvements in US inflation data and rising unemployment rates will affect the decisions of the Federal Reserve. He said Pimco predicts that interest rates will be cut twice, and there is indeed a possibility of a third cut.
Many people are waiting for the Federal Reserve to cut interest rates. There are about $5 or $6 trillion in US money market funds. Once there is a rate cut, it will be a big deal, "said Clarida. His company also believes that the first interest rate cut may occur in September.
Former Kansas City Federal Reserve Bank President Esther George also stated that the Federal Reserve is starting to see signals of the interest rate cuts they have been searching for.
The FedWatch tool of the Chicago Mercantile Exchange Group shows that traders expect the Federal Reserve to almost certainly cut interest rates at its September meeting. The tool predicts interest rate trends based on data from federal funds futures trading.
Is the expectation management of interest rate cuts initiated?
As inflation falls, market expectations for interest rate cuts are becoming increasingly strong. But from the previous attitude of the Federal Reserve, it still needs to wait a little longer. So, do the signals released in the past 24 hours mean that the management of interest rate cut expectations has quietly begun?
Abandoning the policy meeting that began in July would allow officials to collect more high-quality data, a threshold set by Powell at a congressional hearing earlier this month. If Wall Street's predictions of further deflation come true, this threshold will be met. Between the policy meetings in July and September, officials will receive two inflation and employment reports, as well as a series of updates on the health of consumers and the real estate market.
Having more concrete evidence is crucial for calming down some officials who still have doubts about the safety of the situation, especially considering the unexpected inflation outbreak earlier this year. KPMG's Chief Economist for the United States, Diane Swank, said, "They have been deceived before, and credibility is important
Julia Coronado, former Federal Reserve economist and current head of macroeconomic policy outlook, said that the Fed's actions are like an "ocean liner", which means that apart from crises, the Fed usually avoids sudden policy shifts. Coronado expects a "significant" change in the policy statement in July, which will indicate an imminent interest rate cut.
But another concern, according to Michael Strong, director of economic policy research at the American Enterprise Institute, is that the inflation rate is "stuck" at the target level of around 2.6% or 2.7%. He does not advocate for the central bank to take action in September.
Goldman Sachs Chief Economist Jan Hatzius believes that waiting until September to cut interest rates will increase the risk that the Federal Reserve is trying to avoid. He said, "If you wait, the economic risk is that the labor market will further deteriorate. Considering how much the situation has changed - how much inflation has decreased, how much the labor market has rebalanced - why not do what you may need to do in advance