The Federal Reserve announced that it would suspend interest rate hikes in June, and it is controversial for institutions to raise interest rates by another 50 basis points this year.
Our reporter Tan Zhijuan reports from Beijing.
The announcement by the Federal Reserve that it would suspend interest rate hikes in June triggered market concern. A few days ago, the statement of the Federal Reserve’s FOMC monetary policy meeting in June showed that the members unanimously agreed to keep the interest rate unchanged (5.00% ~ 5.25%), which was the tenth consecutive suspension of interest rate hikes since March 2022.
In this regard, industry experts believe that the Fed’s decision to suspend interest rate hikes in June may be due to an unexpected decline in inflation data; At the same time, for the sake of risk management, the Fed hopes to gain more time to assess the risks to the real economy caused by banking pressure and credit tightening.
On June 13th, the data released by the Bureau of Labor Statistics showed that the CPI of the United States increased by 4% year-on-year in May, slightly lower than the market expectation of 4.1%, and the previous value was 4.9%. This is the 11-month continuous decline after the year-on-year increase of the CPI of the United States reached a peak of 9.1% in June 2022.
Explaining the reasons for the suspension of interest rate hikes, the Federal Reserve said: "Keeping the target range unchanged at this meeting will allow FOMC to assess more information and its impact on monetary policy."
However, there are signs that the Fed’s interest rate hike cycle is not over yet. The new FOMC forecast increases the possibility of raising interest rates twice in the next few interest rate meetings, raising interest rates by 25 basis points each time. The possibility of raising interest rates again at the next FOMC meeting in July has increased.
At the same time, Federal Reserve Chairman Powell still maintained a hawkish attitude in the process of answering reporters’ questions, saying that the interest rate hike cycle has not yet ended, and the current inflation still does not support interest rate cuts, and further pointed out the possibility of raising interest rates twice during the year. In addition, the new bitmap shows that the federal funds rate will reach 5.6% by the end of 2023, up 0.5 percentage points from the previous one, suggesting that interest rates may be raised twice this year.
So, will the Fed continue to raise interest rates in July?
Some institutional sources said that looking ahead, it is expected to raise interest rates by 25 basis points in July. However, by September, it is expected that the easing of inflationary pressure will keep the Fed on the sidelines for the rest of this year.
Some industry experts believe that the Fed is unlikely to raise interest rates by another 50 basis points this year.
David Kohl, chief economist of Swiss Baosheng, believes that as inflation continues to decline, there is no need and no expectation for further interest rate hikes.
David Kohl also analyzed that as inflation in the United States is on a sustainable downward track, it is expected that there will be no and no need to raise interest rates further this year. In view of the long-term lag in the impact of monetary policy on the economy, raising interest rates again this year will have little effect on improving the inflation results in 2023.
Zhao Yaoting, global market strategist in Jing Shun Asia-Pacific region (excluding Japan), also told reporters that there is no need for the Fed to raise interest rates again. The data is weakening, which is reflected in the ISM service index. The producer price index (PPI) of the United States is currently negative year-on-year, and the consumer price index (CPI) of the United States may fall below 4% year-on-year in June.
Zhao Yaoting also pointed out: "Although the inflation rate is still higher than the Fed’s target range of 2%, the US core consumer price index (excluding housing) has dropped below 4% year-on-year."
Zhao Yaoting also said that if the Fed tightens monetary policy twice this year, it will really face the risk of excessive tightening, which will lead to a serious recession.
Xie Yunliang, an analyst at Cinda Securities, also said in the latest research report that the signal significance of the Fed’s hawkish guidance may be greater than the actual significance.
In Xie Yunliang’s view, first of all, the current interest rate is close enough to the restrictive level. In May, the real interest rate in the United States was 1.06%, which was higher than the expected annual real GDP growth rate of 1%, which could stabilize economic growth and push down inflation.
Second, the Fed’s interest rate decision is becoming more cautious. By suspending interest rate hikes, the Fed can evaluate more information as a basis for decision-making, and at the same time declare to the market that it "reserves the option of raising interest rates". Then, if the future data is in line with expectations, there may be the possibility that the Fed will no longer raise interest rates.
Finally, the probability of an obvious rebound in the inflation rate in the second half of the year is low, the core commodity items are expected to remain low with excess savings consumption, and the core services and residential items are expected to continue to decline.
Therefore, in Xie Yunliang’s view, based on the decision-making mechanism of the Fed’s "data dependence", it is relatively unlikely to raise interest rates by another 50 basis points during the year.
In this regard, Powell said that there is still a "long way to go" to achieve the 2% inflation target, and the core inflation has not made much progress; It may be appropriate to continue raising interest rates at a more moderate rate; In addition, it has not yet been decided whether to raise interest rates in July, and a decision will be made according to the situation.
In terms of investment, Zhao Yaoting suggested that before the Fed has a clearer statement, it is a more appropriate choice to maintain a tactical defensive allocation of US assets.
(Editor: Hao Cheng Proofreading: Yan Jingning)