On January 31, local time, the two-day Fed’s first monetary policy meeting of the new year will officially kick off in Washington.

The Federal Open Market Committee (FOMC) eased the pace of policy tightening in December after four consecutive aggressive rate hikes of 75 basis points.

The Fed is widely expected to adjust policy to 25 basis points as inflation cools further and the economy signals a pullback.

The outside world will focus on Powell's speech, as well as the Fed's internal views on inflation expectations and the economy. Clues about terminal interest rates and the policy path thereafter will be the most interesting.

Whether the terminal interest rate maintains the 5% target

  Since the last interest rate meeting, a number of inflation indicators have continued to decline.

In the United States last December, the monthly rate of the consumer price index (CPI) and producer price index (PPI) began to turn from rising to falling. As one of the inflation indicators that the Fed is most concerned about, the core PCE that excludes food and energy price fluctuations last month A year-on-year increase of 4.4%, brought the average inflation rate down to 4.7% in the fourth quarter of last year, which is already lower than the 4.8% outlook in the economic forecast released by the Federal Reserve in December.

These signals suggest that the Fed's policies are having an effect.

Adjusting interest rate hikes to the conventional mode under the fall of prices has formed an important consensus within the Federal Reserve.

Since November last year, the Federal Reserve has repeatedly reiterated that when determining the future target interest rate, the Committee will consider the cumulative effect of monetary policy and the lagged impact of economic activity and inflation. This has also been interpreted by the outside world as a signal of a slowdown in monetary policy.

Fed Vice Chairman Lael Brainard hinted this month that a 25-basis-point rate hike would be considered at the next meeting, saying the pace was slowing because monetary policy takes time to have an impact on the economy.

"This logic is very applicable today." Brainard's view has also won the support of many FOMC voters this year, including Philadelphia Fed President Patrick Harker and Dallas Fed President Lori Logan.

  Boris Schlossberg, a macro strategist at BK Asset Management, an asset management organization, believes that the Fed's policy effects are obvious, and raising interest rates by 25 basis points is the most popular choice.

"However, the Fed's pace of raising interest rates will not stop here. According to the current price level, there is still a long way to go to restore price stability. The Fed also hopes to avoid the mistake of prematurely easing policy, and will stick to the inflation issue. ’ he said.

  From the perspective of sub-items, as interest rate hikes further curb demand, supply chain bottlenecks ease, and the trend of commodity price deflation continues, it is still worth watching whether its impact is enough to offset service industry inflation, which may ultimately determine the intensity of the Fed’s interest rate hike this year .

On the other hand, rent-related housing inflation may not peak until mid-year.

  As the recent inflation data exceeded expectations, the

market began to lower its expectations for terminal interest rates.

Fed funds rate futures show that the Fed will end the current round of interest rate hike cycle in the interest rate range of 4.75-5.00%.

However, judging from recent statements, Fed policy makers have not let go of their ultimate goal of more than 5%.

According to CBN statistics, since January, including Atlanta Fed President Raphael Bostic, Kansas City Fed President Esther George, Minneapolis Fed President Neel Kashkari and San Francisco Fed President Many officials, including Mary Daly, have expressed the view that the Fed needs to raise the benchmark interest rate above 5% and maintain it for a period of time.

  Schlossberg analyzed to CBN reporters that from the resolution last December, 17 of the 19 officials within the Federal Reserve agreed to push the interest rate level to a level above 5%, and this position seems to have not changed in the short term. "Since service inflation is still high, the conditions to stop raising interest rates are not yet in place." He tends to wait for the next March meeting. With the release of more data, the Fed's assessment of the impact of monetary policy will also be more accurate. for comprehensive.

Soft landing and early rate cut

  A strong labor market has become a hope for the resilience of the U.S. economy.

Since the outbreak, the U.S. labor supply has remained tight. In December last year, the unemployment rate returned to a record low of 3.5%. At the same time, the Federal Reserve’s Jolts job vacancies continued to remain above 10 million, and each unemployed person had 1.7 jobs.

Unemployment claims across the U.S. have remained low despite news of layoffs at technology companies and interest-rate-sensitive industries such as finance and real estate.

The Fed's Beige Book on Economic Conditions, released in recent days, said businesses continued to report difficulties filling job vacancies.

Even as consumer demand slows, many companies are reluctant to lay off workers.

  Speaking about the possibility of a soft landing at his last press conference, Powell said, "At some point, we need to keep interest rates higher. I think the road is narrow, but if inflation keeps falling, (a soft landing) is more likely Several Fed officials, including St. Louis Fed President James Bullard, have also recently raised the prospect of a soft landing in conjunction with labor data.

  Schlossberg believes that the new crown epidemic has largely changed the structure of the US labor market, including factors such as population aging, early retirement, and weak immigration, which have dragged down the labor supply and made it difficult for the employment participation rate to return to pre-epidemic levels.

He believes that these changes may signal that the labor market is slow to respond to the Fed's restrictive policies, thereby increasing uncertainty.

  In fact, external concerns about recession have not disappeared.

Weakness in consumer demand was further revealed in retail sales data after housing and manufacturing took a hit.

The monthly rate of U.S. retail sales fell for the second consecutive month.

According to statistics from the National Retail Federation (NRF), U.S. holiday sales covering Thanksgiving, Christmas, and New Year’s are worse than industry expectations, and high inflation and rising interest rates have left consumers stretched.

As the main driving force of the US economy, fluctuations on the consumer side may mean that the economic inflection point is approaching.

Bob Schwartz, a senior economist at Oxford Economics, said in an interview with a reporter from China Business News that historically, the Fed’s response to high inflation has almost always ended in recession, and this time is likely to be no exception, because Now the Federal Reserve still insists on achieving the price target, which will further cool down the economy. He predicts that in the second half of this year, the US GDP will begin to experience negative growth for two consecutive quarters, falling into a relatively short-term shallow recession.

  The New York Fed's economic model combined with U.S. bond yields shows that the probability of the U.S. falling into recession has reached 47.3%, a record high since the 1980s.

Worries about a hard landing have also allowed funds to bet on an early shift in monetary policy.

Fed funds futures showed investors expected rate cuts to begin as early as September as the Fed wrapped up its rate hike cycle in the first half of the year.

  The view within the FOMC is that no rate cuts will be considered this year, and the minutes of last December's meeting issued a reminder of this, warning that an unwarranted easing of financial conditions due to public "misunderstanding" of the committee's response would complicate the committee's efforts to restore price stability.

The recent trend of U.S. stocks shows that the expectation of loosening financial conditions is heating up again. Whether Powell will re-emphasize the issue of financial conditions at the press conference may become the trigger for short-term market fluctuations.

  Schlossberg believes that the Fed will affirm the results of slowing inflation, but will continue to emphasize that prices are well above the medium-term 2% target, reiterating that policy decisions will depend on data and look for further signals of cooling inflation.

He predicted that the Fed may hawk again, suppressing market expectations for interest rate cuts and emphasizing the importance of continuing to adopt and maintain a restrictive policy stance.