Text: Ren Zeping's team.
In January, the Federal Reserve announced that it would maintain the federal interest rate at 525%-5.The 5% range remained unchanged, in line with market expectations.
We maintain our previous judgment that a reasonable rate cut could occur in June, with a rate cut of 50-75bp for the whole year. (See U.S. Economic Outlook 2024).
There are five main reasons for the Fed's delay: 1) the economy is still above potential; 2) The supply and demand of the job market are close to balance and remain resilient; 3) Wage growth is difficult to decline further; 4) It is difficult for inflation in low-skilled labor services to cool down; 5) Housing deinflation is limited. 1 fomc: Better balance, more confidence, later rate cuts
The core of this interest rate meeting: to clarify the end of the Fed's current round of monetary policy tightening cycle; release the signal of "no interest rate cut in March"; For the Fed, future changes in the labor market will be more critical than inflation.
Specifically,
First, a "better balance" between inflation and employment。At present, the process of disinflation is slowing down, and the supply and demand of the labor market are close to equilibrium. "Better balance", means:Ensuring that inflation is not substantial** will influence the Fed's monetary policy to a greater extent.
Second, inflation returns to "greater confidence" of 2%. Core PCE fell rapidly year-on-year over the past year, from 56% fell back to 29%, but still above the 2% inflation target; Powell believes that the process of disinflation has not been successful, and whether the inflation decline is sustainable needs to be further verified.
It is worth noting that Powell made it clear that he is more interested in the headline inflation data (core PCE) rather than the itemized structure. We understand that the adjustment of the inflation reference system this time starts with core non-housing services inflation (3.).95%) to the core PCE (29%)More importantly, it not only supports its operation of "no interest rate cut in March", but also paves the way for subsequent interest rate cuts, and future changes in the labor market will be more critical than inflation
Third, it suppressed market expectations and conveyed a "later interest rate cut". Powell made it clear that a rate cut in March is not a baseline scenarioA premature or excessive rate cut would interrupt the already slowing process of disflation, and could ultimately pose the risk of unnecessary secondary tightening.
At this point in time, the Fed is not very necessary to cut interest rates, and the rate cut may be "a little later". There are five main reasons why the Fed is delaying rate cuts: 1) the economy is still growing above potential; 2) The supply and demand of the job market are close to balance and remain resilient; 3) Wage growth is difficult to decline further; 4) It is difficult for inflation in low-skilled labor services to cool down; 5) Housing deinflation is limited.
2 The U.S. economy remains above potential
The real GDP of the United States was 25% (1. in 2022.)9%), benefiting from a low base and "re-acceleration" in 2023; The quarters are: 9% and 31%。Real GDP in the fourth quarter was 33%, down from 4 in the third quarter9%, but significantly higher than the expected 2%.
The four sub-components all contribute positively to GDP. Among them, private consumption fell by 2 year-on-year8%, driving Q4 GDP to 19 percentage points is still the biggest pull of GDP, and the real salary income of residents continues to improve to support retail consumption that exceeds expectations. The proportion of service consumption has the potential to be further restored. The current consumption of goods as a proportion of GDP is 241%, up from 22 percentage points; The current share of service consumption in GDP is 447%, down from 07 percentage points. At the same time, it will also support more employment in the service sector. Private investment in the fourth quarter was 21% (10% in Q3) pulls GDP by 038 percentage points. Non-residential investment was boosted by positive equipment investment, which fell by 1. QoQ9%, pulling GDP 031 percentage points. After concentrated growth in the third quarter, inventory investment increased slightly more than expected in the fourth quarter.
The U.S. replenishment is weak, the trend of industry inventory changes is not uniform, and the systematic replenishment needs to wait for the interest rate cut to be triggered. Specifically, the current U.S. inventory cycle presents three major characteristics: 1) the degree of destocking of non-durable goods is stronger than that of durable goods. 2) Among the non-durable goods, "food and plastic products" are completely destocked, while "clothing, oil" and other inventory levels are high. 3) Among durable goods, "furniture and wood products" are completely destocked, while "electrical equipment" has a high inventory level.
Net exports in the fourth quarter drove GDP by 043 percentage points,Say goodbye to two consecutive quarters of zero growth, ** deficit narrowed significantly. U.S. imports are almost flat in 2023, while exports are up about 21%；Against the backdrop of a relatively strong US dollar, it performed better.
3 BeautyThe supply and demand of the country's job market are close to balance, and the resilience is still strong
Over the years, the U.S. job market has shown strong resilience, especially since the U.S. unemployment rate has remained stable at historically low levels for a long time.
Even with the current marginal decline in demand and the reduction in corporate business, the overall unemployment rate in the United States has not risen significantly. The reason for this is that after the epidemic, the labor supply is tight, the bargaining power of workers is strong, and enterprises still have expectations for the future, enterprises choose to reduce the number of recruiters, but have not started to lay off employees. Correspondingly, the number of job openings in the United States continued to decline, but the unemployment rate was low and sideways. 
Over the years, the average number of hours worked has continued to decline, reflecting that the labor market is close to equilibrium between supply and demand, and there is even a risk of surplus. In the manufacturing sector in particular, both durable and non-durable goods overtime hours slipped to their lowest levels outside of recession cycles. And the decline in average overtime hours exceeded the decline in industrial output over the same period. 
According to the San Francisco Fed, the year-on-year change in the U.S. economic unemployment rate over the past two years has been significantly lower than the long-term linear levelThe U.S. unemployment rate may be "too low".
4 Wage growth is unlikely to decline furtherThe monthly non-farm payroll growth rate was 044% (previous value 0.)35%), hourly earnings increased for three consecutive months, with an annualized growth rate of 4 in three months1%。In 2023, the overall slowdown in wage growth is quite limited, only 4% year-on-year from the beginning of the year4% down to 4 at the end of the year1%。In the short term, it is difficult for the three-month annualized salary growth rate to fall below 4% year-on-year. 
The wage boom continues unabated, and the salary increase plan in the many strike solutions has not yet been implemented, and the bargaining power of employees in the future will still be strong. According to a survey by Mercer, a U.S. consulting firm, U.S. employers plan to give employees a base pay increase of 35% and a 3% pay increase for non-union members9%；According to a World At Work survey based on surveys from 2,090 U.S. companies, the average U.S. employer plans to raise wages by 4 percent in 20240%。In addition, for strike resolution, the eventual agreement on wage increases, and potential short-term wage negotiations will lock in high wage increases over the next 1-3 years. The annual salary growth rate of 4% year-on-year may become a "consensus". Wage growth is a return on productivity growth and inflation expectations, i.e., year-on-year wage growth = productivity growth (12%) + 5-year inflation expectations (30%), in 2018-2019, the US wage growth almost followed this equation, and after April 2023, it was verified again. 
5 Inflation in low-skilled labor services is unlikely to coolHigh inflation in the low-skilled services sector is the key to core inflation. Behind this, there is still a shortage of about 1.5 million people in the low-educated and low-skilled labor force compared with before the epidemic, and it is mainly concentrated in the shortage of young people aged 25-34 with certain educational qualifications.
Therefore, it is difficult for inflation in the low-skilled service sector to cool down in the future, and the inflation in the high-skilled service sector will remain at around 3%, and there is a risk that inflation will rise as the deflation of core goods ends. 
6 Housing deflation is limitedU.S. rent inflation remained the biggest driver of core services inflation, 05%, which means that housing deinflation is extremely limited. The year-on-year price of the United States has bottomed out in June 2023, and the lagged impact of housing prices will bring a new round of upward pressure on housing inflation as soon as the second half of 2024.
Recently, with rising interest rate cut expectations and a lack of real estate supply, major U.S. home price indices have bottomed out**. While new residential construction permits remained stable, new construction started increased significantly. After bottoming out in U.S. real estate at the end of 2022, low inventory and improved real incomes will support existing home sales in 2023. This also has an impact on the sustainability of US housing disinflation. 
Core non-housing services inflation remained close to 0 month-on-month4%, which has remained at the level of 4% year-on-year since the second half of 2023; Core goods inflation returned to positive year-on-year on the back of a larger-than-expected Christmas shopping season. It is difficult to slow inflation without a sharp rise in the unemployment rate, but it is not possible to lay off employees quickly and significantly when companies have abundant cash flows.
The expectation of interest rate cuts has led to the recovery of business confidence, coupled with the marginal easing of credit conditions, and US inflation may face greater demand-side stimulus. 
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