Ping An Shoujing Team:
Zhong Zhengsheng Investment Advisory Qualification Number: S1060520090001 Fan Chengkai Investment Advisory Qualification Number: S1060523010001
Key takeaways.
On January 31, 2024, US time, the Federal Reserve's FOMC meeting kept interest rates unchanged. After the release of the statement and Powell's speech, CME FedWatch showed that the probability of a rate cut in March increased from 554% to 345%, but the probability of at least a 150bp rate cut for the whole year has risen from 61% to 672%；The 10-year Treasury rate slashed by **12bp to 3 during the day92%；The U.S. dollar index closed up 012%；The three major U.S. stock indexes each closed down 08-2.2%。
Meeting Statement: A number of changes, paving the way for steering. The meeting highlighted that two-way risks are moving towards a better balance, paving the way for rate cuts this year, but also stressed that the Fed needs to gain more confidence before cutting rates. There were a number of changes to the statement of this meeting, including: 1) When describing the policy objectives, a new "Committee judged that the risks of achieving the employment and inflation targets are moving towards a better balance". 2) When describing the assessment framework for monetary policy, it was adjusted to "upcoming data, evolving outlook, and risk balance", which is more abstract in wording, but emphasizes "risk balance". 3) Add "The Committee expects that more confidence is needed before cutting interest rates to confirm that inflation can sustainably move towards the 2% target".
Powell's speech: Remain vague, suggesting not to cut interest rates soon. On the whole, Powell maintained vague remarks as expected: first, regarding interest rate cuts, he did not give detailed interest rate cut criteria, nor did he indicate whether the current round of interest rate cuts will be continuous. StillIt mentioned that it is not the most likely scenario for interest rate cuts to start in MarchIt hints that monetary policy will remain patient. Secondly, on the judgment of the economy and inflation, itsThe attitude towards a "soft landing" seems to be more cautious than before, emphasizing that the Fed has not yet declared a victory in the fight against inflation, although it is less concerned about the impact of economic growth on inflation. Finally, regarding the shrinking of the balance sheet,theIt is expected that the Fed will discuss the issue of balance sheet reduction in depth at its March meetingDiscussions at this meeting were limited.
Policy logic: determined game. As for the conditions for the first rate cut, the Fed used a very vague statement that it needs "more confidence", indicating that the Fed's choice of the first rate cut will be highly subjective. The Fed chose not to cut interest rates early, or it was a "game of determination".First of all,The U.S. economy is growing strongly, giving the Fed the confidence not to rush to cut interest rates; Secondly,Since the December interest rate meeting, financial conditions have been loosened due to the fermentation of interest rate cut expectations, further weakening the need for interest rate cuts in March. Finally,The Fed's game with market expectations is still ongoing. If interest rates are cut too early, then it is easy for the market to speculate that the Fed will continue to cut interest rates at subsequent meetings and cut interest rates sharply throughout the year, and it will be more difficult for the Fed to guide market expectations; The Fed may also deliberately isolate interest rate cuts and balance sheet reduction decisions to prevent excessive market concerns about a "liquidity crisis"; The Fed remains steadfast and can convey monetary policy independence.
Market outlook: "Easing trading" faces repetitions. We tend to believe that the current market expectation of interest rate cuts is still a bit "front-running", especially for the judgment of the magnitude of interest rate cuts throughout the year. The "easing trade" in the market may go through some iteration, but it will not be a "tightening trade". If subsequent rate cut expectations are revised, the 10-year Treasury yield is expected to be around 4%**; The U.S. dollar index remains relatively stable, but it is also dependent on non-U.S. economic and policy changes; The valuation environment for U.S. equities is relatively stable, and performance will be more earnings driven.
Risk Warning:The economic and financial risks of the United States exceeded expectations, the stability of the global chain was less than expected, and the political outlook of the United States was uncertain.
Meeting Statement: A number of changes, paving the way for steering. The Federal Reserve stated at its January 2024 interest rate meeting that it would maintain the federal interest rate at 525-5.The target range of 5% is in line with market expectations. At the same time, the Fed maintained other policy rates: 1) Keeping the reserve requirement rate at 54%；2) Maintain the overnight repo rate at 55%；3) Maintain the overnight reverse repo rate at 53%；4) Maintain the Tier 1 credit rate at 55%。In terms of balance sheet reduction, the Fed will maintain its original plan to passively reduce $60 billion in Treasury bonds and $35 billion in agency bonds and MBS per month. In the economic and policy narrative, there were a number of changes in the statement to emphasize that two-way risks are moving towards a better balance, paving the way for a rate cut this year, but also emphasizing that the Fed needs to gain more confidence before cutting rates.
Specifically: 1) When describing economic growth, the phrase "slowing down in economic activity" has been deleted and replaced with "expanding at a steady pace". 2) Removed the description of the risks of the banking system and their impacts. 3) When describing the policy objectives, add:"The Committee judged that the risks of achieving the employment and inflation targets were moving towards a better balance".。4) When looking ahead to monetary policy,The phrase "additional policy consolidation" has been deletedThe change to "adjusting the interest rate range" suggests that the policy can start to consider cutting interest rates, but it does not seem to completely rule out the option of raising interest rates again. 5) When describing the assessment framework of monetary policy, "the cumulative tightening of monetary policy, the lagged impact of monetary policy on economic activity and inflation, and economic and financial developments" was deleted and readjusted to "upcoming data, evolving outlook, and risk balance", which is more abstract in wording, but emphasizes "risk balance". 6）Added "The Committee expects that more confidence is needed to confirm that inflation is on a sustainable path towards the 2% target before cutting interest rates".
Powell's speech: Remain vague, suggesting not to cut interest rates soon. On the whole, Powell maintained vague remarks as expected: first, regarding interest rate cuts, he did not give detailed interest rate cut criteria, nor did he indicate whether the current round of interest rate cuts will be continuous. However, it mentioned that a rate cut in March is not the most likely scenario, suggesting that monetary policy will remain patient. Second, regarding the economy and inflation, it seems to be more cautious about the "soft landing" of the U.S. economy than before, emphasizing that the Fed has not yet declared victory in the fight against inflation, although it is not too worried about the impact of economic growth on inflation. Finally, as for balance sheet reduction, it is expected that the Fed will discuss the issue of balance sheet reduction in depth at the March interest rate meeting, so the relevant discussion at this meeting is relatively limited. After Powell's speech, the market seemed to trade a "recession":The 10-year Treasury rate further closed at 392%, 12bp throughout the day; The U.S. dollar index moved higher, closing the day up 012% to close at 1035；The three major U.S. stock indexes extended their declines, closing down 08-2.2%。CME FedWatch shows that after the Fed meeting, the probability of a rate cut in March has increased by 554% to 345%, but the probability of at least a 150bp rate cut for the whole year has risen from 61% to 672%。
Specifically:1) On when to cut interest rates. "Interest rate cut" is the issue that this press conference is most concerned about. Since the statement mentioned that the Fed needs to gain greater confidence before cutting interest rates, reporters hope that Powell will give more specific criteria. Powell stressed that inflation has been moving well over the past six monthsAt present, the Fed has some confidence, but it needs more confidence to confirm that inflation can come down；As for what more confidence means, the Fed hasn't reached that stage yet, so there's not much to talk about. Nick Timiraos of the New Fed News Agency asks why the Fed needs to keep interest rates higher under the Taylor Rules? Powell said that, on the one hand, different rules give different results; On the other hand, the Fed cannot mechanically adjust interest rates (only according to Taylor's rules) and will also focus on broader financial conditions. In short, the choice of the timing of the rate cut will ultimately be related to "confidence". A reporter asked, is this round of interest rate cuts one-time or cyclical? Powell said that in the short termA rate cut in March is not the most likely scenario；Follow-up will depend on the data.
2) About inflation. Against the backdrop of the current U.S. economic growth and good job market, inflation has become a key variable in the Fed's interest rate cut decision. There are more questions about inflation in this press conference. When judging the inflation situation, Powell emphasized that the decline in inflation in the previous period was mainly due to the repair of the ** chain and the job market; Subsequently, it is expected that goods inflation may return (from negative) to around zero, and services inflation is expected to continue to improve, but it remains to be seen. Housing rents are still high, but the Fed is concerned about broader inflation, and the issue of housing supply is out of the Fed's control. A reporter asked, Wall Street is worried that if interest rates are not cut in time, inflation will fall below the 2% target, what do you think about this? Powell said policy does not want inflation expectations to be below 2%.
3) About employment. Quite a few reporters mentionedEmployment Cost Index (ECI) data(The latest announcement on January 31, U.S. time, showed a quarter-on-quarter increase of 0. in the fourth quarter of 2023.)9%, below expectations of 10%, the smallest increase since 2021). A reporter asked whether the U.S. job market has returned to pre-pandemic levels. Powell emphasized that the job market has moved towards a better balance over the past year; The job market is expected to be close to pre-pandemic levels, but it may not fully return.
4) On economic growth. Journalists are concerned about whether strong U.S. economic growth will affect policy choices. Powell stressed that strong economic growth is a good thing; The Fed is keeping a close eye on the dual targets of employment and inflation, and it depends on whether economic growth will affect both. There is a risk that economic growth will lead to inflation**, which is why the Fed has kept interest rates unchanged; But it wasn't very worried about that. A reporter asked, if it is not said that a "soft landing" has been achieved, can it be said that a "hard landing" can be avoided? Powell did not answer positively, only emphasizing that the unemployment rate has been below 4% for two consecutive years, which is a rare phenomenon in 50 years, and although the job market is also cooling, the overall economic picture is good. 、
5) About balance sheet reduction. A reporter asked whether the Fed discussed balance sheet reduction (QT); What are the conditions for slowing down QT? Is it necessary to reduce the size of the overnight reverse repo to 0? Powell said that the balance sheet reduction issue was indeed discussed at this meeting, but the detailed discussion will be scheduled for the March meeting, when more guidance will be given; The overnight reverse repo size does not necessarily need to fall to 0, but it can stabilize at a certain level to slow down Qt.
Policy logic: determined game. In this statement, the Fed added two new mentions of "balancing risks", believing that the current employment and inflation targets are moving towards a better balance, and the balance of two-way risks will also be considered when considering interest rate cuts in the future. In his speech, Powell specifically described that it is not good to cut interest rates too early and too quickly, and if interest rates are cut too late and too little. ButAs for the conditions for the first rate cut, the Fed used a very vague statement that it needs "greater confidence". In our view, the Fed's choice to cut rates for the first time will be highly subjective. If you look at the trend of inflation alone, especially the progress of inflation in the past six months, it is likely that the Fed is close to meeting the conditions for interest rate cuts. However,The Fed chooses not to cut interest rates soon, remain patient, or play a "game of determination".First of all,The U.S. economy is growing strongly, giving the Fed the confidence not to rush to cut interest rates; What's more, economic resilience may still hinder the subsequent progress of inflation decline. Secondly,Since the December interest rate meeting, financial conditions have been loosened due to the fermentation of interest rate cut expectations, further weakening the need for interest rate cuts in March. Finally, the Fed's game with market expectations is still ongoing. If the Fed cuts interest rates in March, it will be easy for the market to speculate that the Fed will continue to cut interest rates at subsequent meetings and cut interest rates sharply throughout the year, and it will be more difficult for the Fed to guide market expectations. At the same time, the Fed may also deliberately postpone interest rate cuts to isolate the decision to cut interest rates and reduce its balance sheet, and prevent the market from overly worried about a "liquidity crisis". In addition, the Fed remains steadfast and can send a signal of monetary policy independence. (Refer to the report "How to view the "rush" of U.S. interest rate cut expectations?) 》
Market outlook: "Easing trading" faces repetitions. For the market,The direction of the Fed's interest rate cuts during the year remains clearThe recent game point is still at the first rate cut node and the annual rate cut. We tend to think,At present, the market is still a bit "front-running" in the expectation of interest rate cuts, especially for the judgment of the magnitude of interest rate cuts throughout the year. The direction of the subsequent expected revision may be that the Fed will reduce the number of interest rate cuts from 5-6 to about 3 throughout the year.
Against this backdrop, the market's "easing trade" may go through some iteration, but it will not be a "tightening trade". If the subsequent rate cut expectations are revised, the 10-year Treasury yield is expected to be around 4%**; The U.S. dollar index remains relatively stable, but it is also dependent on non-U.S. economic and policy changes, especially whether the BOJ will further signal the exit of negative interest rates; The valuation environment for U.S. stocks is relatively stable, but the 10-year Treasury interest rate of around 4% means that the risk premium of the S&P 500 index is close to zero, and the performance of U.S. stocks as a whole will be more profit-driven.
Risk Warning:The economic and financial risks of the United States exceeded expectations, the stability of the global chain was less than expected, and the political outlook of the United States was uncertain.