Federal Reserve Chairman Powell said at a press conference that almost all participants believe that further rate hikes are appropriate. The understanding of "pause" should not be interpreted as skipping the rate hike in June. The consensus within the Fed is to slightly slow down the pace of tightening as the Fed approaches its rate target. He said that the Fed is already very close to a restrictive rate. In the future, decisions will continue to be made at successive meetings, and the Fed has not yet decided whether to raise interest rates in July. The Fed believes that inflation has eased, but upward inflation risks still exist. In addition, he believes that considering a rate cut should be a matter of years from now.
On Wednesday, June 14th, after the Federal Reserve's interest rate meeting, Fed Chairman Powell held a press conference.
Powell expressed his views on the interest rate decision of this meeting, the inflation trend in the United States, the future policy direction of the Federal Reserve, the macroeconomic situation in the United States, and the dynamics of the labor market, which are all hot topics of concern to the market.
Maintaining the interest rate is a cautious decision
When talking about this interest rate meeting and interest rate decision, Powell said:
At this meeting, considering how far and how fast we have come, we believe that maintaining the interest rate is a cautious decision.
This pause in rate hikes is a continuation of the moderate pace of rate hikes.
Fed officials raised the median expected peak interest rate by 50 basis points to 5.6%.
Powell explained the "pause" in rate hikes:
The understanding of the "pause" should not be regarded as "skipping" the rate hike in June. The consensus is to slightly slow down the tightening pace as we approach the interest rate target. We are already very close to the restrictive interest rate level.
Further rate hikes are appropriate in the future, and interest rate cuts will not occur within the year
Regarding the Federal Reserve's next action plan, Powell said:
Almost all participants believe that further rate hikes are appropriate.
In the future, decisions will continue to be made at each meeting, and we have not made a decision on whether to raise interest rates in July. This meeting did not discuss whether to raise interest rates every other meeting. However, we mentioned the July meeting from time to time during this interest rate meeting, and we will examine all data, changing prospects, and make a decision in July.
As we get closer to our target, moderate rate hikes make sense, and the main issue is determining the degree of further rate hikes.
Continuing to raise interest rates may be reasonable, but the speed should be more moderate. Slower rate hikes can help the economy adapt.
Regarding the relationship between the speed of rate hikes and the terminal interest rate level, Powell said:
The speed of rate hikes and the ultimate interest rate level are two independent variables. We are not far from the peak of the federal funds rate.
As we approach the end of rate hikes, it is reasonable to slow down the pace of rate hikes, and most policymakers believe so. I cannot notify the market in advance what level the federal funds rate will reach in the future, but we are already closer to a sufficiently restrictive level.
Currently, the risks of excessive rate hikes and insufficient rate hikes are balanced.
Powell reiterated that the Federal Reserve is highly concerned about the risks that high inflation poses to the Federal Reserve's dual mandate.
Powell said that reducing inflation may require growth below trend and a softening labor market.
Regarding the market's expectation of interest rate cuts within the year, Powell said:
No one has proposed a rate cut this year, and a rate cut this year is inappropriate. Rate cuts have been discussed in the next few years. Interest rate cuts are appropriate only when inflation falls.
Inflation has eased somewhat, but the risk of inflation remains upward.
Powell said at a press conference that high inflation has brought difficulties to people, and the Fed is still firmly committed to its 2% inflation target. Powell reiterated:
Without price stability, sustained strong labor markets cannot be achieved. The Fed cannot allow high inflation to become deeply rooted, and restoring price stability is our top priority, which will benefit future generations. Price stability is also the cornerstone of the US economy.
Powell said:
Inflation has eased somewhat, but inflationary pressures remain high, and the Fed still believes that there are still upward risks to inflation, and there is still a long way to go to restore the inflation rate to 2%.
However, when we see inflation flattening or softening, we know that tightening policies are working. However, the length of time for the policy effect to lag has great uncertainty, and it is too early to evaluate the full impact of credit tightening. If we see the impact of credit tightening becoming more severe, we will consider it in interest rate decisions.
Powell said that the full impact of tightening policies has not yet been revealed:
The full effect of monetary tightening takes time to achieve, especially in terms of inflation. The degree of the impact of policy tightening is still uncertain. The process of reducing inflation will be gradual. The factors that we need to make inflation fall are playing a role, and it will take some time for inflation to fall.
Regarding the service industry inflation that the Fed is most concerned about, Powell said that the Fed only sees "early signs" of service industry inflation falling.
He believes that the key to the decline in non-housing service industry inflation is the softening of the labor market. In addition, Powell said that there has not been much progress in the decline of core PCE, and the Fed hopes to see this data significantly decrease.
Powell reiterated:
We hope to reduce the inflation rate to 2% while minimizing the damage to the economy.
Powell admitted that the Fed's predictions about inflation decline in the past two years have been wrong. He believes that in 2021, the rise in inflation is due to strong demand for goods, and in 2022 and this year, reducing wage growth is important for reducing inflation:
The Fed's main focus must be on formulating the right policies.
The US economy still has the possibility of a soft landing
When talking about US economic growth, Powell said that the data since the last meeting exceeded expectations, and most decision-makers expect moderate economic growth to continue. Housing market activity is still weak, but the rate of inflation decline in housing services will be slower than the Fed expected, and the Fed will see rental data penetrate into housing service inflation.
Powell said:
We see that the real estate market has bottomed out and there may be a trend of rebound. I don't know if the real estate market itself will push interest rates higher, but it is part of it. I haven't seen rents and house prices rise rapidly for the time being.
Regarding the turmoil in the banking industry, Powell said that the economy is facing headwinds from credit tightening, but the Fed still does not understand all the consequences of the turmoil in the banking industry. He said that bank pressure will be included in the consideration of formulating policies.
Regarding the commercial real estate risk that the market is worried about, Powell said:
It is indeed expected that commercial real estate will experience losses, and it feels like this situation will continue for some time. However, the pressure on commercial real estate is unlikely to be systemic.
Powell believes that the supply chain situation continues to improve.
Powell still believes that there is a way to achieve a soft landing, and a strong labor market gradually cooling down may help the economy achieve a soft landing.
Powell also said that as the US Treasury resumes issuing debt after the debt ceiling deadlock is broken, the Fed will carefully monitor market conditions. He believes:
The US fiscal policy path is unsustainable.
He emphasized:
I won't put too much emphasis on economic expectations because there is too much uncertainty.
Signs of Labor Market Balancing
When it comes to the labor market, Powell said that the dynamics of the labor market are the core of the Fed's discussions, and policymakers expect labor supply and demand to become more balanced:
The labor market is the engine driving economic growth, and it is still very tight. The labor market has brought "surprises" to people with extraordinary resilience. Although labor demand still far exceeds labor supply, there are signs of supply and demand balance in the job market.
Powell said that the unemployment rate has been hovering at historic lows. Regarding the growth rate of wages, he believes:
We expect wages not to decline, but the growth rate will slow down.
Market Reaction
The two-year US Treasury yield soared more than 13.0 basis points after the resolution statement was released, and then refreshed the daily high to 4.7962%. It then fell below 4.69% during the press conference and rebounded to above 4.76% after the press conference.
Spot gold plunged about $14 after the resolution statement was released, and then fell to a daily low of $1940.19 per ounce, followed by a rebound. During the press conference, it rose above $1953 per ounce, and then squeezed after the press conference.
Thomas Simons, an economist at Jefferies, said:
In the Fed's economic forecast, economic growth has been revised upward, and core inflation forecasts have also been revised upward, which is consistent with the meaning of "the Fed will keep interest rates at a high level for a longer period of time" in the dot plot. Our basic expectation is still that the Fed will not further raise interest rates, but future interest rate hikes will depend on the upcoming economic data.
Andrzej Skiba, head of US fixed income at BlueBay, Royal Bank of Canada's global management, believes:
The market generally expects the Fed to pause interest rate hikes, but the dot plot shows that there will be two more interest rate hikes this year, and there is only one left this year. This hawkishness is even stronger than expected by market participants, which is why negative reactions may occur.