12/14 ~ What is expected to be done by the Fed ~

This week's Federal Reserve (Fed) is likely to be a major turning point for policy makers who have been battling runaway inflation for the past two years.

There is almost no possibility that central bank policy makers will decide to raise interest rates. But that's not the point: what is likely to happen after the Federal Open Market Committee (FOMC) ends on Wednesday is a complete reversal from aggressive interest rate hikes and towards the next developmentPolicy changesIt is.

With this, the Fed will forego interest rate hikes for 3 consecutive meetings.

I acknowledge that if inflation accelerates in the future, there is a possibility that the Fed will be forced to raise interest rates further, but there is a higher possibility that the economy will cool down, and I think the scenario should shift in the direction of interest rate cuts rather than interest rate hikes in 2024.

Although there is a high possibility that the transition to interest rate cuts will be expressed in a subtle form, it will be a major axis for the Fed, which has gone through 11 interest rate hikes.

Along with announcing interest rates, the Fed will also update forecasts on economic growth, inflation, and unemployment. Also, at the press conference after the meeting, Chairman Powell may talk about strategies to ease policies now that inflation is slowing down, and he may continue to make harsh statements.

Here's a quick summary of what to expect:

The US Federal Open Market Committee (FOMC) issued a communiqué after the meeting, and there is almost no doubt that the next-day interest rate, which is an indicator5.25% ~ 5.5%It will be announced that it will remain within the range.

There is also a possibility that language adjustments will be made regarding the Committee's evaluations on employment, inflation, housing, and overall economic growth.

Bank of America, for example, believes the committee may stop referring to “additional policy tightening” and simply state that it is committed to bringing the inflation rate back to 2%.

Similarly, Goldman Sachs sees a possibility that statements about monetary tightening will be removed from the statement, and several other minor changes used to communicate bias towards interest rate hikes will be made.

The financial situation, which is a matrix of economic variables and stock prices, has loosened considerably since the previous Fed board meeting ended on November 1.

As a result, a pause is almost certain. However, I wouldn't be surprised if there was a backlash against easing of financial conditions during the press conference, even if it wasn't in a statement. Powell is going to have to deal with that.

If interest rate cuts are imminent, that is the prediction for each member called the “dot plot,” which the Fed is watching closely. What the market is paying attention to is the “median,” that is, the midpoint of all members' predictions for the next 3 years and longer than that.

Market pricing is aggressive. According to calculations, traders in fed fund futures anticipated that interest rate cuts would begin in 2024/5, and that the Fed would cut key interest rates by at least 1 percentage point by the end of the year.

If interest rate cuts are tolerated and the market agrees even slightly, the market will rise more and more.

However, many Wall Street strategists and economists have shown a more cautious attitude. Goldman Sachs, for example, brought forward its initial interest rate cut forecast, but that is until the third quarter of next year, which is far from market prices.

To go bankrupt that fast, a lot has to happen. The second half of this year is more realistic than the first half. I'm not saying that won't happen, but I think it's too early with the current data. Ultimately, the bond market may be right (about interest rate cuts), but that probably won't happen if economic pain isn't involved between now and March.

Every quarter, FOMC members also announce forecasts for gross domestic product, which is the main economic variable, inflation rate shown by the Ministry of Commerce's core personal consumption expenditure price index, and unemployment rates.

The September FOMC showed a slowdown in GDP growth, a slight increase in the unemployment rate, and a gradual return of the inflation rate to the Fed target until 2026.

There won't be a big change in these numbers. Goldman anticipated a “slight upward revision” of GDP and a slight downward revision of the unemployment rate and core PCE inflation rate.

There won't be much change here.

After that, Chairman Powell will be on stage. It might not be in the news, but it might be an interesting event.

While Chairman Powell is conscious of continuing to fight until inflation is overcome, he is also aware that real interest rates, that is, the difference between FF interest rates and the inflation rate, are rising as the inflation rate continues to slow moderately.

Currently, the FF rate is targeted at 5.25% to 5.5%, to be exact, 5.33%. According to the consumer price index released on Tuesday, the inflation rate excluding food and energy in November was 4% per annum, while the core PCE inflation rate was 3.5%, and real interest rates are around 1.8%.

Under normal circumstances, Fed officials see the so-called neutral interest rate (which is neither restrictive nor stimulating) close to 0.5%. Therefore, Chairman Powell should recently state that interest rates are “in a restrictive area.”

It is anticipated that at some point in 2024, the FOMC leadership will consider the ongoing rapid disinflation as a reason why nominal fund interest rates may need to be lowered, with no reason other than maintaining substantial interest rate limits at the same level. However, I don't think Chairman Powell will immediately suggest anything.