Economic Reporter Wu Bin Shanghai of the 21st Century reported that at the end of the austerity cycle, the conditions for triggering the Fed's interest rate hike had become increasingly high.
On 1 November, local time, the Federal Reserve issued an interest rate resolution, in which policymakers agreed to maintain interest rates at 5.25-5.50 per cent between target zones and to suspend the interest rate hike for two consecutive meetings. At the same time, the Federal Reserve has left room in its policy statement for further interest rate hikes, which do not indicate that the interest rate hike cycle has ended.
At the press conference following the interest rate resolution, Federal Reserve Chairman Powell said that there was a possibility of a further increase in interest rates in the future, but that the delicate doves had released a cautious signal that the possibility of future increases had declined.
In response to a question about the Fed's preference for an interest rate hike in December, Powell stated that the Fed's monetary policy stance was restrictive, but that the full impact of the policy had not yet been felt and that “taking into account the progress we have made, we will move cautiously to make decisions based on a balance of data and risks”.
While the Fed has not yet explicitly stated that the interest-rate cycle is over, indications seem to suggest that the Fed may have deliberately created a tight expectation, and that if future inflation trends are not unexpected, the Fed will not carry out another rate hike. Unlike the Fed, which has not yet completely let go, the market has increased its bet on the Fed’s interest rate hike, which will begin to decline by June next year.
Once again, the Fed stands still.
It should be noted that the meeting was the first time that the Federal Reserve had not increased interest rates for two consecutive sessions during the current austerity cycle and that the interest rate on federal funds had remained high for 22 years.
In the economic and policy narratives, the November conference statement featured two major changes. The Federal Reserve described economic activity in the third quarter as “strong”, while a statement in September called the economy “stable expansion”. In addition, the Federal Reserve expanded the description of “credit conditionality” to “financial and credit conditionality”.
The overall rise in the rate of return on United States debt is a key reason for the Fed’s inaction. Zhao Yooting, a global market strategist in the Xinxiang Asia-Pacific region (except Japan), said to economic reporters in the twenty-first century that there had been only a slight change in the wording of the Fed’s statement, including the reference to “financial tightening”, and that the increase in the rate of return on US debt over the past 10 years had somewhat eased the Fed’s interest rate hike, but the Fed would continue to maintain quantitative austerity at the current rate.
The Chief Economist for Safety Securities, Jong-sheng, stated to journalists that the main reason for the Federal Reserve ' s moratorium in November was the rise in the rate of return on United States debt. This rise in the rate of return on the US-American debt was the result of an increase in the term premium due to concerns about the supply of national debt, which could have the effect of discouraging aggregate demand, consistent with the Fed’s interest rate hike. The return on United States debt is either theoretically or by increasing pressure on the financial system and curbing demand growth, but the real impact remains to be seen. In the first three quarters of the year, the cumulative return on United States debt over the 10-year period rose by some 70 basis points to 4.6 per cent, while the United States economy remained resilient.
In the Fed's view, tighter financial and credit conditions for households and businesses may put pressure on economic activity, recruitment and inflation, the extent of which is “uncertain”. In a prudent monetary policy tone, the Fed finally chose to continue “inert”.
Is the breakway or is it over?
Behind the Fed’s increasingly cautious moratorium on interest-rate hikes, the current disagreement between the market and the Fed has become clear, with the Fed’s interest-point array assuming that interest rates will rise again this year and the market not expected; the dot-line map suggesting that the Fed’s interest rate will remain above 5 per cent next year and that the market is expected to fall below 4.5 per cent.
And Powell's ambivalence is becoming more and more obvious. He indicated that further interest rates might be needed to achieve a sufficiently restrictive policy position. In determining whether there is a need for further interest rate hikes, the Fed will take into account accumulated austerity, delayed effects and economic and financial developments, and will not be certain that the current policy is sufficiently restrictive.
It needs to be noted that Powell this time barely spoke of the September-point-line scenario forecast, but simply simply said that the Fed would submit a new forecast in December. This subtle statement is also the key reason why the market interprets the Powell release as a dove.
While the market and the United States of America had been divided, economists had not been able to reach a full consensus. Jong-sheng indicated that the possibility of a further increase in the Fed in December or next January could not be ruled out at this time. First, the upward trend in the United States debt over the last 10 years may not significantly increase financial system pressure and make it difficult to trigger a “sliding down” of the United States economy, which is expected to remain resilient in the course of the year. Second, market interest rates are moving faster, and if there is a significant fall in the return on US debt over the next 10 years, the Fed may reconsider the increase. Moreover, the Fed may need to “realize” a one-time increase in interest rates at some point in the future, which would be more conducive to leading the market to believe that interest rates are “higher and longer”, otherwise the market might be more convinced that the current round of interest rate hikes have ended and that the financial conditions have been too loose to help contain inflation.
On the other hand, the view that the Fed is not expected to increase interest rates is becoming increasingly common. Zhao Yoo-ting stated that this time the Fed was “dove paused” and that although Powell reserved the right to raise the interest rate again, the Fed was likely to have done so. Powell pointed out that the impact of monetary policy would take time to become apparent in the economy, and the Federal Reserve therefore suspended the rate hike this year to allow time for assessment. This suggests that in the future there will be a “long pause in interest rate hike” for the Fed, which, from a later point of view, may mean the end of the interest rate hike.
David Kohl, the chief economist of the Swiss Goldman Sachs, said to journalists that high bond yields and weak stock markets had tightened the overall financial situation, making it less necessary to raise interest rates again. Looking ahead, expected weak economic growth and low inflation will convince the Fed that there is no need for further tightening of policies and that interest rates will remain within their current range until September 2024.
The Fed currently expects that the US economy will not decline, but if the recession eventually occurs, the Fed’s interest rate will probably fall even more next year. The double-line capital CEO, Jeffrey Gundlach, states that “higher and longer interest rates do have a dark side, which has affected the debt market over the past six to eight weeks. Interest spending will soon rise, and the market must face the fact that we can no longer maintain such interest rates and deficits. If the economy declines as I expected, the Fed will not reduce interest rates by only 50 basis points next year, but 200 basis points.”
There's still a long way to go.
On 1 November, against the backdrop of a further decline in the Federal Reserve's probability of future interest rate hikes, the United States equity market was both high, with a single-day decline in the return on multi-period United States debt of nearly 20 basis points, a decline in the return on two-year United States debt of 14.2 basis points to 4.954 per cent, a decline in the return on five-year United States debt of 19.6 basis points to 4.66 per cent, a decline in the return on 10-year United States debt of 19.4 basis points to 4.739 per cent and a decline in the return on 30-year United States debt of 16.1 basis points to 4.932 per cent.
Although the level of the Fed Eagles has diminished, it will take some time to move towards easing. As Powell said, the Fed is not considering or talking about interest rate reductions at all, and the focus is on whether the Fed's policy is sufficiently limited. The question is: Should more interest rates be raised?
In the view of Chung Jung-sheng, there is still a distance between “lax trading”. Over the next 1-2 months, the return on United States debt over a 10-year period may remain high. In the United States economy, US economic data will remain resilient during the year; in terms of interest rate expectations, the possibility of a further increase in the Fed in December or January of this year cannot be ruled out, and interest rates are expected to have room for improvement; in terms of inflation expectations, if geo-conflicts persist or even widen, the risk of rising international oil prices cannot be ruled out, US debt inflation is expected to remain high or high; in terms of US debt supply, the current market concerns about “supply-to-demand” of public debt prevail; and there is uncertainty as to whether the US two parties will succeed in adopting a new budget program and whether the size of the new budget will be reduced to “satisfaction” to market satisfaction.
For United States shares, there may be some fluctuations, but perhaps no deep adjustments. In September and October, the three major U.S. equity indices had undergone some adjustment, with a cumulative decline of 8.4 per cent, 7.0 per cent and 4.8 per cent, respectively, in NASDAQ, BP500 and Dow Jones industrial indices. The rise in interest rates on United States debt led to a decrease in the United States equity risk premium, a decrease in the equity value ratio and increased pressure for capital outflows from the stock market.
In addition, the United States dollar index is unlikely to decline significantly in the short term. According to the Zhongqheng analysis, the United States dollar index is either relatively stable or has a resistance both up and down. The United States economy is still more resilient than non-United States economies, such as Europe and Japan, and in particular the overall upward trend in oil prices over the second half of the year has further expanded the comparative advantage of the United States economy and underpinned the dollar index.