The U.S. Federal Reserve (Fed) decided to raise interest rates by 1 yard this week, and once again slowed down the pace of interest rate hikes. Tao Dong, director of the China Chief Economist Forum, said that the Fed “turned the left light and turned right” and staged a hawkish reduction , and he does not expect central bank officials to cut interest rates this year.
The Fed raised interest rates by 1 yard this week, maintaining a relatively hawkish tone, emphasizing that “continuing to raise interest rates within the target range will be appropriate.” Tao Dong said that the move is in line with his expectations for the Fed, that is, central bank officials “turned the left light and turned right”, returning to the traditional rate hike force on the one hand, and trying to manage market expectations for rate cuts on the other hand.
Despite the Fed’s reference to the recent deceleration in inflation, the Fed emphasized in its post-meeting statement that “further increases in policy rates are warranted” before ending the rate hike cycle.
Fed Chairman Jerome Powell pointed out that although inflation has fallen, the labor market is still overly tight, and inflation in the core service sector continues to rise. “Now is not the time to declare victory,” he concluded. He reiterated that the Fed is more concerned about inflation risks than growth risks.
This meeting does not involve revising economic forecasts and dot plots. Powell mentioned that the committee will raise interest rates two more times, bringing the policy rate above 5.0%. At present, the dot plot predicts that the interest rate will rise to 5.00-5.25% and then stop raising interest rates. Tao Dong predicts that the Fed will raise interest rates 1-2 times, 1 yard each time, and will not cut interest rates this year.
Both U.S. stocks and U.S. bonds are satisfied with the Fed’s slowdown in raising interest rates, and both stocks and bonds rose. Faced with half a glass of water, is it half full or half empty? The market decided to interpret it positively, emphasizing “disinflation,” which means that inflation is gradually under control, while the economy still shows enough resilience to seem to avoid recession.
Tao Dong believes that what really inspires investors is what Ball did not say. Powell avoided mentioning the recent improvement in financial conditions, signaling a willingness to tolerate a positive turn in market sentiment. Recently, the credit bond and stock markets have all rebounded significantly. The Fed chose not to suppress it, which shows that the central bank officials are focusing on the employment-price spiral, and they are happy to see an improvement in the financial environment.
US inflation data has improved significantly, but the job market is still overheated. The market agrees with the Fed on this. However, the market believes that the US economic situation will be worse than the Fed expected, and the job market will soon reverse, forcing monetary policy to make a “hairpin turn” in the second half of the year. On this issue, Tao Dong agrees more with the Fed.
In addition, the stock market and the bond market have different views on the economic outlook. The bond market believes that a recession is inevitable, while the stock market tends to believe in a “soft landing.” Tao Dong believes that excess savings are basically exhausted, and the wealth effect brought about by soaring house prices has been reversed. Consumption will lead the economy to cool down, but economic recession is not inevitable.