Text/Qiu Muzi

This time there is no new move by the Fed.

In the early morning of the 2nd, the Federal Reserve announced that it would keep the target range of the federal funds rate unchanged at 5.25% to 5.5%, in line with market expectations.

After two consecutive pauses, is this the end of the Fed's rate hikes?

Look at the economy: strong performance?

Zhou Maohua, a macro researcher at the financial market department of Everbright Bank, told China News Service that in recent months, inflation in the United States has performed well in the fall, and market interest rates have soared, and financial conditions have tightened, reducing the need for the Federal Reserve to raise interest rates further.

The Federal Reserve's latest interest rate meeting statement said that the U.S. economy grew strongly in the third quarter, the unemployment rate remained low, and inflation remained high. The U.S. banking system is sound and resilient.

The CICC research report pointed out that the Fed believes that the U.S. economy is strong, inflation is high but further improving, and it is not in a hurry to resume raising interest rates under the trade-off. The recent rise in Treasury interest rates and tighter financial conditions have also given the Fed more time to wait and see.

From the perspective of the monetary policy statement, compared with September, one of the wording changes is that the judgment on economic growth has been revised from solid to strong, and the employment statement is also more optimistic than before, deleting the expression that new jobs have slowed down in recent months, and replacing them with a slowdown in new jobs compared with the first half of the year.

Fed Chairman Jerome Powell gave reasons for the strength of the U.S. economy from both the demand and supply sides:

On the one hand, consumer spending has outperformed expectations this year, suggesting that it may have underestimated the resilience of household balance sheets and the continued expansion of employment to support consumption momentum. On the other hand, the recovery of supply chains and the rebound in labor force participation are both conducive to economic growth and helping to ease inflation.

Looking to the future: to raise interest rates or not?

"We will proceed with caution." At a press conference after the regular monetary policy meeting, Powell said: The recent climb in US Treasury yields has pushed up borrowing costs, which may ease price pressures and affect the Fed's monetary policy. "There is no interest rate cut at all" and there is still a long way to go to bring inflation down to the set target of 2%.

Interest rate cuts are far away, so will they come again?

Zhou Hao, chief economist of Guotai Junan International, believes that Powell basically did not discuss the possibility of mentioning "one more interest rate hike" in the September interest rate meeting, and instead expressed it as "submitting new expectations at the December interest rate meeting". For the bond market, which has been "panicking" for a long time, they seem to have received only one signal: the possibility of the Fed ending this round of interest rate hikes has further increased.

The research report of Huatai Securities pointed out that Powell did not rule out the possibility of subsequent interest rate hikes, saying that he had not yet decided whether to raise interest rates in December, but his statement on the tightening of financial conditions and the decay of the effectiveness of the dot plot over time suggested that the Federal Reserve may have ended the interest rate hike cycle, and the overall statement released a dovish signal. It is more likely that the Fed will not raise interest rates at its December meeting. However, if inflation exceeds expectations significantly in the near future, especially if core inflation and inflation expectations pick up significantly, the possibility of another rate hike by the Fed may rise.

In Zhou Maohua's view, although the Fed released that it may still raise interest rates in the future, the market interprets it as dovish, betting that the Fed will end its interest rate hike cycle and is expected to cut interest rates as soon as mid-next year. The Fed is at odds with market expectations.

He pointed out that the U.S. employment and economic performance are strong, but inflation is also entering a difficult phase. The inflation base effect has weakened, the downward trend of commodity inflation has slowed down, and wage growth and geopolitical conflicts have led to greater uncertainty in the inflation path. In addition, in an environment of uncertainty, the Fed wants to maintain flexibility in policy operations.

"December could still be the last rate hike." Zhou Maohua said that if the U.S. consumption, employment data, and market interest rates fall more than expected, it may reduce the likelihood of the Fed's interest rate hike decision in December.

Look at the impact: market respite?

U.S. equities and bonds rose in response to signals from the Federal Reserve that the Fed's tightening cycle might be over, followed by Asian equities.

Xiao Jiewen, an analyst at CICC, believes that for the market, a pause in interest rate hikes will help boost market risk appetite, and assets that have adjusted more in the early stage will get a respite. Judging from the signals released by this meeting, the room for further increases in short-term interest rates in this round of interest rate hike cycle may be relatively limited. Although Powell said that a rate cut is still out of the agenda, at least for economic growth, the risk of the Fed "going too far" has decreased, and the growth outlook is also favorable.

"Ideally, if demand continues to fall steadily and supply continues to improve, the probability of a soft landing for the U.S. economy in the future will further increase under the 'two-pronged approach'." Xiao Jiewen said that after the interest rate meeting, the U.S. bond interest rate has fallen, the three major U.S. stocks have risen, and the dollar has fallen, which also shows that the market's risk appetite has improved.

"The Federal Reserve paused interest rate hikes this time, and the external market sentiment improved, and the sentiment of China's stock market was warm." Zhou Maohua said that on the whole, the impact of the current round of Fed interest rate hikes on China's economy is limited, and the marginal impact on China is expected to continue to weaken at the end of the Fed's interest rate hike.

Zhou Maohua said that the main reason is that China and the United States are in different cycles, and the Fed's aggressive interest rate hike has not had a substantial impact on China's economy, macro policies and market liquidity. China's policy has always been independent and there is ample policy space. From the perspective of market performance, the short-term fluctuations of the domestic stock market are more affected by macroeconomic fluctuations, and the impact of the Fed's interest rate hike and rhythm changes is not obvious. Judging from the recent market performance, the market sentiment is gradually stabilizing and warming with the positive support of macro policies, the low valuation of the stock market, and the stabilization and recovery of domestic consumption and domestic demand in recent months.

The enlarged meeting held by the Party Committee of the People's Bank of China and the Party Group of the State Administration of Foreign Exchange on the 2nd also stressed that comprehensive measures should be taken to stabilize market expectations, firmly maintain the smooth operation of the financial market, timely correct the pro-cyclical and unilateral behavior of the foreign exchange market, and prevent the risk of large fluctuations in the RMB exchange rate.