Will the Fed cut interest rate for the third time in the year? No more cuts in the year?
The US Federal Reserve cuts interest rates by 25 basis points.
At 2 a.m. today, the Federal Reserve announced the latest October interest rate resolution. The Federal Reserve cut interest rates by 25 basis points as scheduled, and the federal funds rate was adjusted to 1.50-1.75%, which is in line with expectations.
From the statement of the Feds resolution, the Fed stressed that the labor market is strong, economic activity is growing moderately, household spending is strong, the unemployment rate is low, and the overall tone is slightly hawkish.
The Fed voted 8-2 in favor of todays policy decision. George and Rosengren want the interest rate to remain unchanged. At the last meeting, the Fed voted 7:3, Brad wanted to cut the interest rate by 50 basis points, while George and Rosengren wanted the interest rate to remain unchanged.
Economic activity rose at a moderate rate, the Fed said in a policy statement. Household spending grew strongly. Investment and exports remain weak, but consumer spending is strong.
The Fed reiterated its plan to buy treasury bonds at least until the second quarter of 2020. Reiterate that employment growth has been steady in recent months and the unemployment rate remains low. Reiterate that the labor market remains strong and economic activity has been growing at a moderate rate.
The Fed also cut the discount rate to 2.25%. Adjust the excess reserve ratio (Ioer) from 1.80% to 1.55%.
In terms of inflation, the Fed reiterated that the inflation rate is below 2%. The Fed noted that market-based inflation compensation remains low. Overall and core inflation remains below 2%.
However, the Federal Reserve also pointed out that fixed investment and exports of enterprises have weakened. Uncertainty remains and the appropriate interest rate path will be evaluated.
Here is the full text of the FOMC policy statement released by the Federal Reserve in Washington on Wednesday:
Information received since the FOMCs September meeting shows that the labor market remains strong and economic activity is growing at a moderate rate. In recent months, the average employment growth is steady, and the unemployment rate is still low. Although household spending has been growing at a strong rate, business fixed investment and exports remain weak. On a 12-month basis, the overall inflation rate and the inflation rate excluding food and energy are both below 2%. The market-based inflation compensation index is still low; the survey based long-term inflation expectation index is almost unchanged.
To fulfil its statutory duties, the Commission seeks to promote full employment and price stability. Given the impact of global developments on the economic outlook and sluggish inflationary pressures, the committee decided to reduce the target range of the federal funds rate to 1.5% - 1.75%. This action supports the committees view that the continued expansion of economic activity, strong labour market conditions and the proximity of inflation to the committees symmetrical 2% target are the most likely outcomes, but the uncertainty of this outlook remains. As the committee considers the future path of the target range of the federal funds rate, it will continue to focus on the impact of the latest information on the economic outlook.
Before that, on July 31, 2019, the Federal Reserve began to cut interest rates for the first time since the normalization of monetary policy; on September 19, the Federal Reserve continued to cut the federal funds rate by 25 basis points to the target range of 1.75% - 2%.
In fact, the operation of the Feds monetary policy is crucial for central banks around the world. In the interest rate increase cycle of 2015-2018, the Feds interest rate increase made some emerging market currencies face great devaluation pressure, and the Turkish Lira and Argentine Peso plummeted. After this years shift to easing, a number of central banks followed the Federal Reserve to cut interest rates, and there was a rate cutting tide in the world.
Summary of the key points of the Federal Reserve Chairman Powells press conference
2. Interest rate hike attitude: at present, no interest rate hike is considered. When the time is right, there will be time to raise interest rates; inflation needs to rise sharply before raising interest rates.
3. Quantitative easing: Treasury bond purchase is purely a technical measure, which should not be regarded as quantitative easing (QE).
4. Inflation situation: we do not see any risk of a sharp rise in inflation; we hope to anchor inflation expectations and make them consistent with the 2% inflation target.
5. Economic environment: since this year, the economy has been very resilient, and the Federal Reserve continues to expect the economy to expand at a moderate rate.
Shortly after the Fed approved a 25 basis point cut on Wednesday, Powell hinted that the medium-term adjustment he had been talking about for the past five months might be over.
As long as the latest information about the economic situation is generally consistent with our expectations, we believe that the current monetary policy position may still be appropriate, he told reporters at a press conference after the meeting.
In a speech to the media, Powell said that monetary policy is in a good position because the basic economic outlook is still favorable.
He repeatedly stressed the phrase may still be appropriate and stressed that as long as the outlook is roughly in line with our expectations, the current interest rate will remain unchanged.
Of course, if there are developments that lead to a major reassessment of our prospects, we will respond accordingly. Policy is not on a pre-set trajectory, Powell said.
The market reacted violently
US equities up, A50 up
A50 continues to pull up.
After the US dollar index text message rose, all gains were made after the Feds resolution was recalled, and it turned negative in the day.
Spot gold staged a V-shaped reversal. At the beginning of Powells speech, the short-term fell about $8 to a low of $1480.82/ounce, but then continued to rise from the low.
Why cut interest rates?
Since this year, the consumption data of the United States has remained strong, especially in the second quarter, the growth rate of private consumption exceeded 4%, becoming the leading force supporting the economy. In July and August, U.S. retail sales continued to rise.
The U.S. economy is dominated by the consumption and service industries. Only when the enterprises substantially reduce capital expenditure, the consumers reduce durable goods consumption, and the total demand falls, the enterprises reduce staff, affect the residents income, break the cycle of economic boom expansion and self-sustaining, and have a wide impact on the consumption and service industries, can the recession be triggered.
Under current conditions, although the manufacturing PMI index continues to decline, its transmission process still needs time. This is also an important reason for the Feds optimism about the US economy. However, the previously released US retail data in September showed negative growth for the first time in seven months, significantly lower than the market expectation, which seems to show that the weakness of manufacturing industry is transmitting to a broader field, which makes the markets expectation for the Federal Reserves interest rate cut in October significantly increased.
How many times will the Fed cut interest rates? Delete the promise of take appropriate measures to imply that interest rate reduction will be suspended in the future
It is worth mentioning that investors should not pay attention to the Feds interest rate cut itself. In particular, investors need to pay attention to the statements related to the end time of interest rate cut.
The focus of this time is to pay attention to the policy statement issued by the federal reserve after the interest rate resolution, and what kind of signals are released. In the statement, the Federal Reserve indicated that the threshold for further interest rate cut is getting higher and higher, and it may suspend interest rate cut in the future, because the economic growth of the United States is relatively stable now, and there is no obvious sign of recession. The Fed officials themselves are a very different group. Some of them oppose to continue to cut interest rates, which brings great uncertainty to the future monetary policy of the Fed.
Comments about future easing also point to higher thresholds.
The FOMC deleted a key phrase that appeared in its post meeting statement since June, saying it was committed to taking appropriate action to sustain economic expansion. Powell used this stage in early June to prepare for the rate cut in July, which has been included in the official language since then.
Instead, more moderate language.
The committee will continue to monitor the impact of upcoming information on the economic outlook and assess the appropriate path for the target range of the federal funds rate, the statement said.
At a conference earlier after the interest rate resolution, Federal Reserve Chairman Jerome Powell said the current stance on monetary policy may still be appropriate. A substantial change in the outlook will continue to respond.
Powell said the Feds policy adjustment will continue to provide significant support to the economy. The Fed is committed to making the best decisions based on facts. The Feds interest rate cut is an increase in precautionary measures at a time of risk. We believe that monetary policy is right.
In response, bipan Rai, head of North American foreign exchange strategy at capital markets of imperial Commercial Bank of Canada, commented that from the Feds comments, we can draw the conclusion that the Feds insurance interest rate reduction stage may be over.
So far, he said, there is no decisive signal that the Fed has completed this round of interest rate cuts. On the contrary, from the policy statement and Powells words, the market saw some vague language. We read it as a signal that the Fed will stay put for some time.
Dec Mullarkey, managing director of investment strategy at slcmanagement, said the market appeared to be satisfied with the neutral stance taken by the Federal Open Market Committee (FOMC) and Federal Reserve Chairman Jerome Powell on Wednesday because it implied confidence in US economic growth and implied that the Federal Reserve would respond if there were dark clouds.
Now, the Fed has raised the threshold for rate cuts and pushed its policy to the hawkish zone.
However, in the global context of weak inflation, if inflation expectations in the United States do not improve after entering next year, the Federal Reserve will feel pressure to cut interest rates again.
It is worth noting that Standard Chartered Bank expects the Federal Reserve to cut interest rates in December. In its research report, the bank pointed out that signs of slowing economic growth and moderate inflation expectations provided conditions for interest rate reduction, while the decline in corporate marginal profits and the slowdown in consumer spending growth should alert the Federal Reserve.
Swiss Baida asset management predicted that the Fed would cut interest rates for the last time this year. However, the agency believes that interest rates may be cut again next year, as US economic data will remain weak. The market has largely reflected interest rate cut expectations. The central banks release of funds is not enough to drive the stock market. The market needs more other impetus.
As of the publication, the Chicago Mercantile Exchanges Federal Reserve observation tool shows that the probability of predicting the federal funds rate of the Federal Reserve of 1.50% - 1.75% in December 2019 is 77.0%, and the probability of reducing the interest rate to 1.25% - 1.50% is 20.8%.
Changjiang analysts believe that the core factor determining whether the Federal Reserve is a preventive or recessive interest rate cut is the fundamental change of the U.S. economy
What does the Fed look at in the end? The US economic trend is the core element. Since 1988, the Federal Reserve has experienced two rounds of preventive interest rate cuts and three rounds of recessive interest rate cuts. Whether it is a preventive or recessionary interest rate cut, the corresponding U.S. economy is in a weak state. The difference is that if the U.S. economy then stops falling and rebounds, the Federal Reserve will switch from a preventive rate cut to an interest rate increase, and once the U.S. economy continues to decline, the Federal Reserve will start a recessive rate cut.
Since the end of September, with the overall weakness of the US economic data, the market expectations of the Feds interest rate cut within the year have increased significantly. With the latest release of manufacturing PMI in September in the United States falling to a new low in recent 10 years, and the overall weakness of production, investment and consumption data, the market changed from the expectation that the Federal Reserve would not cut interest rates within the year to that the Federal Reserve would continue to cut interest rates more than once; among them, the market expected that the probability of the Federal Reserves interest rate cut in October rose rapidly from 40% to more than 90%.
The easing tide continues, and the central banks of many countries take action!
Recently, the global central banks easing tide has resumed, and the Russian central bank cut interest rates more than expected on Friday.
On October 24, Turkeys central bank cut interest rates by 250 basis points to 14%, the third rate cut in the year, and the market expects to cut interest rates by 100 basis points. The world bank raised its forecast for Turkeys economic growth in 2019, saying domestic demand has improved.
Turkeys economy will achieve zero GDP growth this year, the world bank said in its October 9 economic update for Europe and Central Asia. In its June report, the World Bank predicted that Turkeys economy would contract by 1% in 2019. According to the latest Bank estimates, the countrys GDP growth will rebound to 3% this year and reach a higher 4% in 2021.
Indonesias central bank cut its benchmark interest rate by 25 basis points to 5.00%, the fourth rate cut in the year, in line with market expectations. According to data released by the Central Bureau of statistics in early August, Indonesias GDP grew 5.05% year on year in the second quarter of this year, the lowest quarterly growth rate in two years. Moreover, Indonesia has twice lowered its economic growth forecast to 5.05% this year, the slowest in nearly two years. Previously, growth was expected to be 5.3% and 5.1% respectively.
The Central Bank of the Philippines announced to cut the banks reserve ratio from December 1. In the second quarter of this year, the GDP growth rate of the Philippines was 5.5%, the lowest quarterly growth rate since the first quarter of 2015, lower than the target of 5.6% in the first quarter and 6-7% expected by the Philippine government.
The Philippine central bank has also cut interest rates three times this year to stimulate the economy. On September 26, the Central Bank of the Philippines announced its third interest rate cut this year, cutting the benchmark interest rate by 25 basis points to 4%. In 2018, the Central Bank of the Philippines raised interest rates several times due to rising oil and rice prices, which continued to push up inflation and the pressure of currency devaluation, raising the benchmark interest rate all the way to 4.75%, becoming one of the largest central banks in Asia to tighten monetary policy last year.
Does the central bank follow?
Wang Qing, chief Macro Analyst of Dongfang Jincheng, believes that the current domestic monetary policy is characterized by I-oriented, and the influence of the interest rate policy of the Federal Reserve is weakened. Even if the Fed cuts interest rates, the domestic rate probably wont follow.
Earlier, on October 21, the peoples Bank of China announced its October LPR offer - one-year (4.2%) and more than five-year (4.85%) were flat in September. CICC believes that LPR will not be lowered any more, indicating that the official policy position tends to be neutral. It is not excluded that monetary policy is more constrained by the recent rapid rise of CPI. In September, CPI touched 3. Although it was completely driven by the rapid rise of pork prices, based on the recent communication between the central bank and the market, it may still be one of the considerations for monetary policy-making.
Sun Guofeng, director of the central banks monetary policy department, said at a press conference on the 15th that there is no basis for sustained inflation or deflation in China at present, but it is also necessary to prevent the spread of inflation expectations and form a vicious circle. The central bank needs to pay attention to the expected changes, more through reform to reduce financing costs. Through the implementation of sound monetary policy, the growth of money supply m2 and social financing scale is basically matched with the growth of nominal GDP, releasing a sound signal. He also pointed out that the current benchmark interest rate for deposits remained stable. Through the reform, the interest rate of loans is mainly focused on LPR, which is also conducive to the stability of expectations, so as to achieve the balance between the two.
In September, Yi Gang, governor of the peoples Bank of China, pointed out that Chinas economy is in a reasonable range and prices are in a moderate range. Chinas monetary policy should maintain its fixed strength, adhere to a stable orientation, stabilize the current situation, strengthen counter cyclical adjustment, and maintain the growth rate of M2, social financing scale and nominal GDP roughly matching. We will resolutely refrain from flooding, and at the same time pay attention to maintaining a stable leverage ratio so that the debt of the whole society will remain at a sustainable level.
In the view of Mingming, chief fixed income analyst of CITIC Securities, considering that the global economy may face long-term downward pressure, domestic monetary policy is not eager to adopt a larger-scale relaxation to maintain the long-term effectiveness of conventional instruments. On the premise that the domestic economic growth rate reaches the standard, the priority of the quality of economic development is higher than the growth rate, and the fourth quarter may be an important observation window of monetary policy.
How to influence American stock and a share?
Data from LPL financial, a financial services company, shows that the S & P 500 index rose by more than 10% and 20% in the following six months and one year after interest rates fell in 1975, 1996 and 1998.
This may be hard to understand given the super high return on equity investment this year. So far this year, the S & P 500 is up 21.3%, the Dow Jones industrial average is up 16.14%, and the Nasdaq composite is up nearly 25%.
Weve seen three consecutive 25 basis point cuts during the slowdown, most recently in the mid and late 1990s, said Ryan Detrick, senior market strategist at LPL financial. The good news is that the interest rate cut after the slowdown can accelerate the rebound of economic growth, and the stock market certainly performs well.
In terms of A-share, under the background of global economy entering the interest rate reduction cycle and interest rate falling, there are three main logic lines in A-share market:
First, leading enterprises with stable profits can fully benefit from the downward interest rate. The downward systematic interest rate means that the valuation of enterprises with stable profits has a systematic opportunity to rise.
Source: editor in charge of China Fund News: Yang bin_nf4368