How close is the Fed to ending rate hikes?

(Economic Observer) How far is the Fed from ending interest rate hikes?

　　China News Agency, Beijing, February 2 (Reporter Xia Bin) As expected by the market, the Federal Reserve decided to continue raising interest rates by 25 basis points at its first interest rate meeting in 2023. This is the eighth consecutive rate hike since March last year. But the pace of interest rate hikes has fallen back, and interest rates are now at their highest level since October 2007.

　　Judging from the statement issued by the Federal Reserve, in terms of economic expectations, the expression of inflation has been greatly revised, showing that inflationary pressures in the United States are being eased. At a high level", the impact of the epidemic and the Ukraine crisis on inflationary pressures has weakened.

　　On the monetary policy stance, the Fed stated that "continued increases in the target range will be appropriate" and that "in determining future growth in the target range, the Committee will consider the cumulative tightening of monetary policy, the lag with which monetary policy affects economic activity and inflation, and the economic and financial development".

　　In other words, the Fed will continue to pay close attention to inflation risks and is expected to raise interest rates.

　　Ming Ming, chief economist of CITIC Securities, said that judging from Fed Chairman Powell's speech after the meeting, he does not think it is time to suspend interest rate hikes.

Inflation takes time to come down, so interest rates need to be kept higher for a longer period of time.

　　Wen Bin, chief economist of Minsheng Bank, also mentioned that Powell's signal to the outside world is that the Fed is in the early stages of disinflation and it will take time to win.

However, he also stressed that the Fed has no incentive and does not want to tighten rates too much.

　　Cheng Shi, Chief Economist of ICBC International, said that from the perspective of the Federal Reserve, although the continued decline in overall inflation and core inflation has eased the pressure on the Fed’s policymakers, the current decline in inflation expectations is still in the early stages of the downward path.

Short-term inflation expectations are significantly affected by seasonal and energy factors. If the impact of seasonal factors on energy and food prices recedes, there is a risk of a rapid rebound in inflation expectations.

　　As things stand, how close is the Fed to ending rate hikes?

“We expect one or two more rate hikes from the Fed this year, then a pause in rate hikes as real rates begin to rise above the appropriate level the Fed expects. Once the rate hike cycle is over, we expect the Fed to hit the pause button. And watch the state of the economy to see if an easing cycle is appropriate," said Santiago Milano, macro strategist at Wellington Investment Management.

　　Talking about the future policy path of the Fed, Li Chao, chief economist of Zheshang Securities, proposed to pay attention to three aspects.

One is the pace of interest rate hikes in the future.

Both the statement of the interest rate meeting and Powell's post-meeting statement emphasized that the process of raising interest rates has not yet ended, and there may still be more than one rate hike.

　　The second is whether to cut interest rates within the year.

"We believe that the expression of relative flexibility has not completely locked the possibility of interest rate cuts this year." Li Chao said bluntly that Powell has given sufficient room for policy flexibility, saying that "if the economic performance meets expectations, it is inappropriate to cut interest rates", but It would also be reconsidered in assessing policy if "inflation fell faster than expected."

　　Third, changes in the financial environment.

Li Chao mentioned that since the end of October last year, the rebound of U.S. stocks and the fall of U.S. bond interest rates have improved financial conditions, which to a certain extent reflect the long-term easing expectations of institutions, and Powell has not clearly "refuted" this.

　　To be clear, we still maintain the judgment that the Fed may stop raising interest rates in the first quarter of this year (that is, the last rate hike will be in the first quarter of this year), and the end point of the rate hike may be around 5%.

　　He further stated that in essence, the Fed’s rate cut is closely related to the downward speed of U.S. inflation and the overall deterioration of the economy, especially the labor market. Considering the possibility that the downward speed of inflation may be slower than expected, the rate cut is expected to be triggered by further deterioration of the U.S. economy.

"Since there is still a high probability of a recession in the U.S. economy this year, in essence we think it will be more difficult for the Fed to avoid a rate cut in 2023."

　　Li Chao also mentioned that although the Fed's current attitude is neutral, it should also pay attention to the potential pressure on financial stability in Europe. Once the risk of European debt begins to ferment, it may become an unexpected shock factor outside the current Fed's decision-making framework and affect the pace of interest rate hikes. Possibility of accelerated steering.

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