Regarding the future path of interest rate cuts, Powell pointed out that interest rate cuts have begun to come into view, and policymakers are thinking and discussing when it is appropriate to cut interest rates. Powell also said that the Fed is willing to cut interest rates even if there is no economic recession.
On December 13, Eastern Time, the Federal Reserve announced its last interest rate decision of the year. According to the announcement, the FOMC decided to maintain the target range for the federal funds rate at 5.25%-5.5%. This is the third consecutive time that the Federal Reserve has kept interest rates unchanged, in line with market expectations.
At the same time, the Federal Reserve announced that it would continue to maintain other policy interest rates. The deposit reserve interest rate was maintained at 5.4%; the overnight repurchase rate was maintained at 5.5%; the overnight reverse repurchase rate was maintained at 5.3%; and the primary credit interest rate was maintained at 5.5%, all in line with market expectations. In terms of balance sheet reduction, the Fed continues to maintain its original plan to passively reduce US$60 billion in Treasury bonds and US$35 billion in agency bonds and MBS every month.
December interest rate decision announcement: Added many dovish words
Looking specifically at the resolution announcement, the Fed has made little overall change in the economic and policy descriptions, but has added a lot of dovish language. For example, in describing the economic growth rate, the Federal Reserve deliberately stated that “growth has slowed down compared with the third quarter”; in terms of inflation, the Federal Reserve clearly pointed out that “inflation has cooled down in the past year”; most importantly, in terms of monetary policy, In the description, the Fed stated that in determining the extent of “any” additional policy consolidation in the future, the committee will consider all factors in formulating policies.
However, the Fed also stated that the Committee will continue to monitor the impact of new information on the economic outlook as it evaluates the appropriate stance of monetary policy. The Fed said the committee would be prepared to adjust the stance of monetary policy as appropriate if risks arise that could impede achievement of the committee’s goals. The Committee’s assessment will consider a wide range of information, including labor market conditions, inflationary pressures and inflation expectations, and financial and international developments.
Affected by the news, the three major U.S. stock indexes rose sharply that day, all hitting 52-week highs, and the Dow hit a record high. Among them, the Dow rose 512.30 points to close at 37,090.24 points, an increase of 1.40%. This is the first time the index has closed above 37,000 points, surpassing the record set in January 2022. The Dow hit an intraday high of 37,094.85 points. The S&P 500 index rose 1.37% to close at 4707.09 points. This is the first time the index has exceeded 4700 points since January 2022. The Nasdaq Composite Index rose 1.38% to close at 14733.96 points.
In the bond market, after the 10-year meeting decision was announced, the 10-year U.S. bond yield fell 18bp to 4.02%. The current U.S. bond yield has fallen by nearly 100bp since the high of 4.98% on October 19. Under the logic of interest rate differentials, the U.S. dollar index weakened.
Federal Reserve’s December Economic Outlook: A total of 75BP of interest rate cuts in 2024
In the economic outlook for December disclosed by the Federal Reserve this time, there are many changes compared with September. Overall, Fed officials remain optimistic about the U.S. economy in 2024 and expect to start multiple interest rate cuts next year.
In terms of economic growth, the Federal Reserve significantly revised up the US economic growth forecast for 2023 from 2.1% to 2.6%, and slightly revised down the US economic growth forecast for 2024 by 0.1 percentage points to 1.4%.
In terms of inflation, the Federal Reserve significantly revised down the PCE inflation forecast and core PCE inflation forecast in the United States in 2023, both by 0.5 percentage points, to 2.8% and 3.2% respectively; at the same time, it slightly revised down the PCE inflation forecast and core PCE inflation forecast in the United States in 2024. , to 2.4% and 2.4% respectively, with a downward revision of 0.1-0.2 percentage points. The Fed’s inflation target is 2%.
In terms of employment, against the background of job market resilience, the Federal Reserve has maintained the unemployment rate at 4.1% in both 2024 and 2025, and raised the unemployment rate to 4.1% in 2026, which is close to the natural unemployment rate (4%) considered by the Federal Reserve.
In terms of interest rates that the market is paying attention to, according to this dot plot, the median forecast of policy interest rates by Fed officials in 2024 is 4.5-4.75%, corresponding to a cumulative interest rate cut of 75BP; the median forecast of interest rates in 2025 is 3.5-3.75%, corresponding to A total of 100BP of interest rate cuts were recorded during the year; the median policy interest rate forecast for 2026 is 2.75-3%, which is still higher than the long-term interest rate level of 2.5%.
Although the Fed has not yet clearly mentioned the interest rate cut schedule, according to CME’s “Fed Watch”: the probability that the Fed will keep interest rates unchanged in the range of 5.25%-5.50% in February next year is 83.5%, and the probability of raising interest rates by 25 basis points is 0%. , the probability of a 25 basis point interest rate cut is 16.5%. The probability of keeping interest rates unchanged by March next year is 20.9%, the probability of a cumulative 25 basis point interest rate cut is 66.7%, and the probability of a cumulative 50 basis point interest rate cut is 12.4%.
Powell: Interest rate cuts have begun to enter the horizon, and political events are not considered in monetary policy formulation
At this press conference, Powell’s attitude changed significantly compared to before.
Regarding this interest rate decision, Powell said that the committee is currently acting cautiously and cannot clearly rule out the possibility of raising interest rates at this time. This view is consistent with the interest rate statement. Powell said that interest rate levels have entered restrictive territory, but he is ready to further tighten monetary policy if conditions are appropriate. Policymakers do not want to rule out the possibility of further interest rate increases, but Powell himself believes that the possibility of an interest rate increase next year is small. Comments indicate that the Federal Reserve may not be in a hurry to adjust its benchmark interest rate in the short term.
Regarding inflation, Powell said that the committee remains committed to reducing the inflation rate to the 2% target. Although inflation is still high, it has eased significantly. We welcome this progress, but we need to see more. “Polls show that the average American is still living with high prices, and that’s something people don’t like to see.”
Regarding the future path of interest rate cuts, Powell pointed out that interest rate cuts have begun to come into view, and policymakers are thinking and discussing when it is appropriate to cut interest rates. Looking ahead, interest rate cuts have inevitably become a theme. “The question of when is it appropriate to start easing existing policy restrictions is starting to come into view, and it’s obviously a topic being discussed around the world, and it’s also a topic we’re discussing at the meeting today.”
Powell also said that the Fed is willing to cut interest rates even if there is no economic recession. And we will not wait until the inflation rate reaches 2% before cutting interest rates, because that will be too late and will exceed the target. It will take some time for the policy to affect the economy.
Regarding the concept of soft landing, Powell believes that there is almost no reason to think that the economy will fall into recession, but unexpected events cannot be ruled out next year. This possibility always exists, and if an economic recession occurs, it will seriously affect the decision to cut interest rates. Reducing inflation to 2% without causing a sharp rise in unemployment would qualify as an “economic soft landing,” but Powell is clearly not ready to declare victory.
Regarding the labor market, Powell said: “Employment growth remains strong, but taking into account population growth and labor force participation rates, employment growth is falling back to more sustainable levels, and the era of severe labor shortages is over.”
2024 is about to be an election year in the United States. Powell emphasized: “The committee members do not consider political events… We cannot do that. The Federal Open Market Committee only focuses on economic aspects to determine monetary policy. At present, stubbornly high prices and the Federal Reserve Aggressively high interest rates have caused U.S. President Joe Biden’s approval ratings to slip, three days after he called on the Federal Reserve not to raise interest rates further because of strong employment data, marking a rare comment from Biden on the Fed’s policymaking.
Attached: Full text of the Federal Reserve’s December interest rate decision statement
2023-12-15 06:28:00
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