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@qinbafrank
Regarding the June interest rate meeting: Keeping the policy unchanged is a cautious move. The Feds interest rate decision in the early morning was unchanged as expected by the market. There were several parts that exceeded market expectations. Here are my personal understandings: 1. Compared with the full text of the interest rate decision in early May, there are two changes: the evaluation of inflation has changed from a lack of further progress in May to modest further progress. The change in inflation wording is still very important. Another is the deletion of the specific statement on the adjustment of the balance sheet reduction plan. I was a little confused when I first saw this. Later, I thought that the QT Taper should have been clarified before, so after June, the specific implementation operation will be the responsibility of the New York Fed. Then, we can read the report disclosed by the New York Fed. 2. Regarding the dot plot that everyone pays attention to, it is indeed adjusted a lot compared with March. The dot plot shows that no one expects three interest rate cuts this year, while more than half of the officials expected at least three interest rate cuts last time. Nearly 80% of the officials expect at least one interest rate cut this time, and the number of officials who expect no interest rate cuts this year has doubled to four. At first glance, it is still very hawkish, and it seems that the message conveyed by the market is also the same. But take a closer look: among the 19 voting members, 7 believe that it is appropriate to cut interest rates once before the end of the year, 8 believe that it is necessary to cut interest rates twice, and 4 believe that there should be no rate cut this year at all - everyone is concerned about only one rate cut, which is just the median forecast of the voting members. In fact, there are more people who predict two rate cuts. From this perspective, it will be better. Lets look at a more distant forecast: it is expected that there will be one 25 basis point rate cut in 2024 (while the dot plot in March predicts three times), and it is expected that there will be four 25 basis point rate cuts in 2025 (previously expected to be three times) - in short, the number of rate cuts expected this year will decrease, and the number of rate cuts expected next year will increase. 3. Regarding economic forecasts, the Fed maintains the GDP growth forecast for this year, next year and the next three years and longer-term unchanged, and slightly raises the unemployment rate forecast for next year and the next year and longer-term by 0.1 percentage point, and raises the PCE inflation forecast and core PCE inflation forecast growth rate by 0.2 percentage points this year, and the expected growth rate of these two inflation indicators next year by 0.1 percentage point. 4. Regarding Powells press conference, I read the transcript. It feels a bit lackluster, probably because of the changes in the dot plot and economic forecasts, Powell doesnt need to say too much. Let the market digest and figure out the dot plot. How to understand the change in the Feds attitude this time? 1. My biggest feeling is that the Fed has learned a lesson and is more cautious. Why do you say that? If you have an impression, you can look back at the two meetings in the fourth quarter of last year, especially the one in early November, because inflation was weak at that time, the Fed was very optimistic and clearly put forward the expectation of interest rate cuts in 24 years (of course, the US Treasury yield reached 5% in mid-October 23, which meant that there was a liquidity shock, which also forced the Fed to express a more optimistic attitude), so that the market expectations were far ahead of the Fed, and it was believed that there would be five to six interest rate cuts in 24 years, and financial conditions were actually looser. For a highly financialized country like the United States, the market expectations are optimistic, financial conditions are substantially loosened on a large scale, risk markets are strengthening, and wealth effects are increasing, which will naturally lead to stronger consumption and services. The market strength in the fourth quarter of last year was linked to inflation in the first quarter of this year, and then rebounded after three months. The markets reflexivity once again played a role. From this perspective, the Feds caution this time is understandable. Especially last night, the May CPI came out and was lower than expected. If the Feds forecast is more optimistic at this time, then market expectations will rise again, and the situation in the fourth quarter of last year will repeat itself, which is more unfavorable to the trend of inflation in the future. At present, the driving effect of market expectations is very obvious. Under the data preference, the market expectations are optimistic, and the Fed has more reason to be cautious. After all, they dont want inflation to repeat again. This is also the reason why Powell said that most officials did not modify their forecasts at the data release conference. Being cautious is also a reverse regulation of optimistic sentiment. 2. Once bitten by a snake, you will be afraid of the rope for ten years. The Fed may intend to avoid repeating the mistake of opening champagne in advance last year. We have talked about it before. The market needs to gradually confirm the positive signals, and in fact, the Fed does the same. Especially after the lessons learned at the end of last year, we are still very vigilant about the improvement of inflation data in one month. The time window for the Fed to confirm inflation changes may be extended. The CPI in April is not stronger, and the CPI in May is not enough to confirm that inflation has reversed the rebound trend in the first quarter. We may have to look at the data in June and July. From this perspective, the dot plot mentioned earlier predicts 19 votes: 8 predict two rate cuts, 7 predict one rate cut, and 4 predict no rate cuts. There will be a lot of variables at the September interest rate meeting. 3. We have talked about this many times before. The current Federal Reserve has given up forward-looking thinking and follows the data step by step. So we just need to look at the data. In the short term, I personally think that I am still cautiously optimistic: I am optimistic because inflation was not stronger in April, it weakened across the board in May, and the unemployment rate reached a key position of 4%, which determines that there should not be a big drop; But I am cautious because the attitude of the Federal Reserve has not changed, and the market is hesitant about this. Then I also want to look at the data for one or two more months to see if inflation has really reversed the rebound trend in the first quarter. There may be more large-scale fluctuations, which requires us to be more patient and wait for new events or data to stimulate the trend.
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