Fed's plan to cut interest rates in March dashed? Powell retorted, what is China's response?
The long-awaited rate cut in March could fail again.
In the early hours of February 1, the Federal Reserve announced the decision of its first interest rate meeting in 2024, maintaining the federal interest rate at 525%-5.50% unchanged.
But crucially, Powell switched from a ** stance to a hawkish stance in December, where he explicitly told reporters that in terms of fighting high inflation,"We have not yet declared victory"。
At the same time, Powell stressed:
More data is needed to confirm the persistence of the downward trend in inflation, but based on today's meeting, it is unlikely that the committee will have a level of confidence ahead of the March meeting"。
In other words, a rate cut in March is almost impossible, and the Fed's determination to keep rates high is much stronger than the market thinks.
After Powell's speech, the effect was immediate: the probability of a rate cut by Goldman Sachs** in March fell to 35%, compared to 73% a month ago, in other words, by half.
However, the market is not completely desperate for a rate cut, and the current market reflects that the probability of a rate cut in May is around 90%, but the probability is only a probability, and it is unknown whether the Fed will make a choice until the last minute.
The fundamental question is: if the Fed slows the pace of rate cuts much more than expected, how should we respond?
The Fed has made it clear why it is deliberately dampening market expectations for a rate cut in March:
The Fed's biggest concern has always been a further rise in inflation.
After the Fed took a stance in December, the CPI data followed suit, up 3 year-on-year4%, up from 3 last month1% up 03%, further away from the Fed's stated target of 2%.
And this also proves that the Fed's fight against inflation is not over, and even in some ways, it is likely to make a comeback due to the high rigidity of inflation.
Especially now that the geopolitical crisis is intensifying and the situation in the Red Sea is becoming increasingly tense, international oil prices are on the rise, which is bound to exacerbate the Fed's concerns about inflation.
Judging from the wage data, the current wage growth rate in the United States has not slowed down, and consumer confidence is still strong, which has led to the formation of a channel in the U.S. economy with sufficient consumer confidence - good business operation - wages ** - increased consumer confidence - inflation spiral. - Rising consumer confidence – an upward spiral channel for inflation.
Therefore, it will not be easy for the Fed to defeat inflation, which is why it refused to cut interest rates in March.
The Fed may have started its rate-cutting cycle much later than many people thought.
This is mainly due to the last century"Burns lessons"It has left a decades-long psychological shadow on all Americans, including the Federal Reserve, and even formed a stress response.
In 1976, after the Federal Reserve under Burns raised interest rates aggressively for two consecutive years, inflation appeared to be effectively under control and fell to an appropriate level.
As the unemployment rate continues to rise, Burns chose to cut interest rates early, making the Fed's tightening monetary policy stop-and-start, and inflation not only did not stand firm, but resurfaced and became out of control.
Until 1979, inflation in the United States reached a staggering 145%, the United States is completely mired"Stagflation"The U.S. economy has suffered a catastrophic blow with high inflation and a sharp rise in unemployment.
Coincidentally, today Powell is facing the same situation as Burns.
Therefore, on the premise of learning from Burns's lesson, the Fed under Powell will be more resolute in curbing inflation, and it is likely to choose a more hawkish posture and carry out high interest rates to the end.
As for when the Fed will actually decide to cut rates, this is a very subjective question, no one can judge the exact moment, the only thing we can confirm is that the rate cut is inevitable, but now the Fed is clearly not ready.
In fact, the market ** Fed failed to cut interest rates not once or twice, but as early as November 2022, the market said that the Fed would cut interest rates at the beginning of **, and then in 2023, there will be multiple rate cuts**.
However, no matter how well the justifications are cited, they will invariably end up being slapped in the face.
In fact, the Fed has been cautious about cutting interest rates, and has stressed to the public that as long as the inflation problem remains serious, it will be difficult to achieve interest rate cuts.
And this is clearly not good news for the global economy; On the contrary, in anticipation of the Fed's rate cuts, global markets are just waiting for the boots to hit the ground like hope.
But now, the March rate cut has failed, and Powell has broken market expectations, which is undoubtedly a huge blow to the world economy and the Chinese economy.
But on the other hand, the Fed is not shy about saying that even if the rate cut came much later than expected, and in the end it was long overdue.
China's economy has stabilized after a year of recovery, and it has shown strong resilience, not being dragged down by the Fed's biennial cycle of interest rate hikes, and the exchange rate has not changed much.
So the next key is still to stimulate the economy, encourage consumption and solve the employment problem, which will get better and better as long as we continue to accelerate rather than slow down.
Written in the end: with a change in plans, a return to inflation data, and the emergence of a hawkish figure in the Fed, it makes sense to delay a rate cut.