In the face of banking risk events, what signals does the Fed continue to raise interest rates?

Original title: (Economic Watch) In the face of banking risk events, what signals does the Fed continue to raise interest rates?

Beijing, March 3 (ZXS) -- Recently, with the frequent occurrence of risk events in the banking industry in the United States and Europe, whether the monetary policy of central banks of various countries has "turned" has become the focus of attention from the outside world.

In the early morning of the 23rd Beijing time, the Federal Reserve announced that it would raise the target range of the federal funds rate by 25 basis points to the level of 4.75% to 5%, the highest level since October 2007, which is its ninth consecutive interest rate hike and also released a number of important signals.

Regarding the expectation of future interest rate hikes, the Fed's statement after this interest rate meeting indicates its attitude. The latest statement removed the phrase "it is expected that continued rate hikes would be appropriate" and predicted that some additional policy tightening may be appropriate to form a sufficiently restrictive monetary policy stance. In determining the magnitude of future rate hikes, the Fed will consider the cumulative tightening of monetary policy, the lagging impact of monetary policy on economic activity and inflation, and economic and financial developments.

The chief economist of CITIC Securities clearly said that the changes and wording in the statement reflect that the Fed's interest rate hike may be near.

CICC Research also said that the statement implied that the end of the interest rate hike was near, and the recent banking turmoil has reduced the need for further interest rate hikes in the future.

The research report pointed out that Fed Chairman Powell's speech also shows that the Fed hopes to maintain greater flexibility on the future path of interest rate hikes, especially the interest rate decision at the next meeting. Looking at the dot plot, Fed officials' median forecast for the federal funds rate at the end of 2023 remains unchanged at 5.1%, as the rate has now increased to 4.75% to 5.0%, which may mean a final 25 basis point rate hike in the future.

In other words, the Fed's rate hike is close to the "finish line", and the dot plot shows that there may be another rate hike this year.

The Fed also has a clear inclination in the choice of whether to keep financial markets or suppress inflation. Tao Chuan, chief analyst of Soochow Securities, bluntly said that the Fed's 25 basis point interest rate hike, statement on the soundness of the banking system, and hint that interest rates will not be cut within the year are all significantly different from market expectations, indicating that inflation risks still dominate in the short term.

At the press conference, Powell stressed: "We are committed to restoring price stability. Asked if the Fed was concerned that further rate hikes would further exacerbate the banking sector's woes, he said the Fed was really focused on macroeconomic outcomes, and that the credit crunch caused by banking problems had the same effect as raising interest rates to some extent.

In fact, compared with the Fed's "calmness", the market does not recognize, investors believe that the Fed underestimated the potential impact of this round of banking turmoil.

"The Fed's fight against inflation is far from over." Tao Chuan pointed out that a series of stronger than market expectations in the United States economic data in February hinted at the risk of another acceleration in inflation, and the market had begun to price in the Fed's 2 basis point interest rate hike before the liquidity crisis. The meeting statement replaced the previous comments that "inflation has slowed but remains high" to "inflation remains high" and "firmly committed to restoring the 50% inflation target", showing the stubbornness of inflation.

Cheng Shi, chief economist of ICBC International, said that between rising financial instability and persistent inflationary pressures, the Fed will no longer impose more aggressive interest rates in the short term, but it will not easily change the prudent tone of monetary policy in the long run.

Cheng Shi further said that, first of all, the current popularity provided by the Fed through the discount window cannot be regarded as a signal of the Fed's "balance sheet expansion"; Secondly, the current performance of the US repo market is still stable, the repo interest rate is still within the control range of the Fed's interest rate, and whether the Fed's policy will turn in the future needs to pay close attention to the use of repurchase facilitation tools; Finally, in the short term, the Fed may passively tolerate the persistence of high inflation, which may increase the possibility that the US economy will fall into "stagflation".

Zhang Jingjing, chief analyst of China Merchants Securities Macro, believes that what the market is worried about now is that the Fed is in a dilemma. Continue to raise interest rates, the banking industry is likely to have a thunderstorm; Without raising interest rates, the fire of inflation is difficult to extinguish. For the Fed's decision, it seems that the "athletes" are worried about the "referee".

The market is also speculating how far away is from a rate cut? Prior to this rate hike, the market expected the Fed to raise interest rates again in May and start cutting interest rates in July. "This forecast is too aggressive, and it is not ruled out that the Fed will start cutting interest rates as early as the end of the year, but at least it will not turn around immediately as soon as the rate hike ends." Zhang Jingjing said.

The above-mentioned CICC Research reported that overall, the Fed believes that the stronger-than-expected economic data since the beginning of the year is roughly "offset" with the recent banking turmoil, and there is no need to raise interest rates too much, nor do they need to cut interest rates soon, it is best to wait and see. Considering that the banking turmoil has just fermented, the extent of the impact is unknown, the Fed may tend to be cautious, and does not need to accelerate interest rate hikes to curb high inflation for the time being, nor does it need to cut interest rates to save the economy from fire. (End)