Since mid-August, the Federal Reserve has been sending tough policy signals to the outside world. Although raising interest rates may bring shocks, its attitude to combat inflation has not changed.

  For policymakers, strengthening communication with the outside world will help avoid market shocks.

Therefore, US stocks have stabilized since the middle of last week, and policy expectations have been further digested. The Fed's interest rate fund futures show that there is little suspense in raising interest rates by 75 basis points in September.

  With the release of the latest US inflation data on the 13th local time, the focus will gradually turn to the game of how the Fed will slow down policy tightening in the future.

The Fed's policy effects are beginning to show

  Federal Reserve Chairman Jerome Powell last week reiterated his recent hawkish stance.

"History strongly warns against premature easing," he told the Cato Institute's 40th annual monetary conference.

"We're going to keep trying to get inflation under control until the job is done." His comments echoed comments made by the Fed's No. 2 and Vice Chair, Lael Brainard, at a Bank of New York policy meeting.

The latter said at the time to guard against the risk that households and businesses might start to expect inflation to stay above 2 percent over the long term.

"

  With the Federal Reserve entering a period of silence, the market has basically reached a consensus on the policy outlook for this month.

Several institutions, including Goldman Sachs, Bank of America and Nomura, raised their forecasts for the September meeting to 75 basis points from 50 basis points.

According to the CME interest rate watch tool of CME Group, the probability of the Fed's historic 75 basis point "three consecutive increases" has risen to 92% a week later.

  Now the most aggressive rate hike cycle in nearly 40 years is paying off.

Since the consumer price index (CPI) exceeded 9% in June, the signs of inflation peaking have become more apparent.

Boris Schlossberg, a macro strategist at asset management agency BK Asset Management, said in an interview with China Business News that for prices, changes in energy prices have the greatest impact.

According to data from the American Automobile Association (AAA), the average price of gasoline has fallen for more than 80 consecutive days, and the impact of the end of the summer driving season on the relationship between supply and demand is expected to continue to be released.

At the same time, the impact of a strong dollar on other commodities also eased price pressures on end products.

  The gradual recovery of supply chains and the economic slowdown amid cooling demand are easing the already tight consumer supply and demand environment.

The latest U.S. Purchasing Managers (PMI) survey showed that the index of prices paid by manufacturers fell to the lowest level since June 2020, while the price paid by the service sector hit a new low since January 2021.

Respondents reported recent improvements in supply chain and logistics costs, said Anthony Nieves, chairman of the services industry survey committee at the Institute for Supply Management.

  Inflation expectations are gradually cooling.

The University of Michigan consumer survey showed that one-year inflation expectations fell to 4.8% in August from 5.2% previously, a new low for the year, while five-year inflation expectations fell to 2.9%, at the lower end of the nearly one-year range.

At the same time, the one-year breakeven inflation rate in the U.S. bond market, an important indicator of the price outlook, has fallen below 2%, the first time it has been below this level in nearly two years.

  Jonathan Golub, chief U.S. equity strategist and head of quantitative research at Credit Suisse, believes that this is the latest sign of a collapse in inflation expectations, "The Fed is not trying to control the next inflation measure, it is trying to control the next 12 to 18 Months of inflation. If expected inflation is falling, other things being equal, that may mean that policy doesn’t have to be tightened too much.”

When will the rate hike rhythm be adjusted?

  Judging from the quotations of federal funds rate futures, after the expected rate hike of 75 basis points in September, the probability of continuing to raise interest rates by at least 100 basis points in the remaining two meetings this year also reaches 30%, but this round of tightening cycle may be suspended after March next year.

This shows that investors are still worried about the Fed's continued hawkish stance this year, and with interest rates reaching or exceeding the limit level, monetary policy is expected to usher in a new window period.

  Schrossberg told Yicai that oil prices can help curb short-term inflation expectations, but there are other obstacles that may keep the Fed from letting its guard down.

For example, the costs of "core" inflation factors such as housing, education, health care, transportation, etc., are more difficult to control in the short term.

Judging from the statements of Fed officials, they seem to believe that the speed of inflation cooling is not as smooth as expected.

  Wells Fargo noted that the Fed's fight against inflation is increasingly complicated.

While food and fuel prices have fallen, the presence of sticky inflation, such as apartment rents, means the inflation road will be "rocky" in the coming months.

The bank expects the CPI to fall back below 7% by the end of 2022 and then to 3.5% by the end of next year.

That would still be well above the Fed's 2% target.

  Inflation data released by the United States on the 13th local time is expected to be an important benchmark for the Fed's next move.

At present, the market expects that the year-on-year growth rate of CPI in August will drop to 8%, and the monthly rate will drop by 0.1 percentage points, which is the first time since the beginning of the epidemic in May 2020, but the monthly rate of core CPI will rebound slightly.

Blerina Uruci, chief U.S. economist at T.Rowe Price, wrote: “The possibility of annual core inflation picking up in the next two reports due to base effects will be a factor for the Fed’s unease. They will pay more attention. Momentum and focus on growth changes in the next three and six months. At the same time, the Fed is also sensitive to public and congressional perceptions, and there is reason to maintain a hawkish stance.”

  UniCredit Bank believes the latest inflation data will be mixed and generally neutral.

The Fed will continue to observe future data performance as a reference for policy decisions.

BMO Capital Market strategist Ian Lyngen wrote that when the CPI in August was priced at 75 basis points, the market will think about how the Fed will adjust the pace of future interest rate hikes.

  It is worth noting that the impact of monetary policy on the economy has attracted widespread attention within the Fed.

The US PMI fell below the line of prosperity and decline in August, and the signs of cooling in the real estate market became more and more obvious.

Powell said in a Jackson Hole speech last month that rate hikes could cause "pain" and a "sustained period of below-trend growth."

U.S. Treasury Secretary Yellen said on Sunday that (recession) is a concern, "The Fed needs great skill and some luck to achieve what we sometimes call a soft landing, which is keeping the labor market strong. while reducing inflation.”

  Therefore, the outside world will pay close attention to any possible changes in the Fed's policy stance next.

Bob Schwartz, a senior economist at Oxford Economics, said in an interview with China Business News that the personal savings rate in the United States has dropped to 5%, the lowest level since 2009.

While consumer spending has shown resilience, choices have become more cautious.

Now that the impact of the economic slowdown on the job market is being felt, he expects weaker labor demand and economic conditions to translate into a slowdown in consumption momentum in 2023, threatening the goal of a soft landing.