On Wednesday, the market will pay close attention to Federal Reserve Chairman Powell's information on whether inflation concerns may lead to interest rate hikes. The Zhitong Finance App learned that Rick Rieder, Blackstone Group's chief global fixed income investment officer and head of the global allocation investment team, said that the inflation rate in the core service sector remains high, and this has always been a major problem faced by the Federal Reserve.

Rieder pointed out that how Powell handles a possible rate hike in response to stubborn inflation will be critical, as the market will respond to this “major problem.” He said that Powell has described the Federal Reserve's policy interest rate as “restrictive” in the past, but it only takes time to keep the inflation rate down to the central bank's 2% target.

Rieder believes Powell doesn't want to raise interest rates any further. From when the market was too optimistic about interest rate cuts at the beginning of the year to now some investors may think that the Federal Reserve will not cut interest rates at all in 2024, the market's views have changed. He said, “If the data allows, I still think the Federal Reserve hopes to cut interest rates once or twice this year.”

The Federal Reserve will announce its latest decision on interest rates at 2 p.m. EST on Wednesday, and Powell will hold a press conference at 2:30 p.m. EST on the same day.

According to data from the CME FedWatch tool, federal funds futures show that traders expect the central bank to cut its benchmark interest rate only once this year from the current 5.25% to 5.5% range. At the end of the data, it is expected that the Federal Reserve may lower its policy interest rate for the first time in November.

If Powell shows a “hawkish” attitude on Wednesday, the stock market could fall due to a jump in US Treasury yields.

Although sharp increases in interest rates have had an impact on the stock market in the past, the US stock market seems to have finally adapted to these changes. Rieder pointed out that although the initial rise in 10-year US Treasury yields may make investors uneasy, “when it stabilizes at a certain level, watch the stock market recover rapidly.” Some people once thought that “everything is over” when the 10-year US Treasury yield reaches 4%.

However, according to Dow Jones market data, at 3 p.m. on March 28, the 10-year US bond coupon interest rate was 4.192%, while the S&P 500 index hit a record closing high.

Although the rise in US bond yields accelerated in April, the performance of the S&P 500 index declined in April, ending a five-month continuous rise. However, as of Tuesday afternoon trading, the index is still up about 6% this year, down only 2.6% from its all-time closing high on March 28.

Affected by concerns about inflation, interest rates on US bonds accelerated in April, but are still below the peak of 2023. FactSet data shows that on Tuesday afternoon, the two-year US Treasury yield was reported at around 5.02%, while the 10-year US Treasury yield rose to around 4.66%.

Rieder expects the market to keep a close eye on inflation data over the next few months, particularly in the service sector. He said that commodity inflation now seems to have disappeared, but inflation in the service sector is generally still “high.”

For example, inflation in the core services sector after excluding housing was 6.9% on an annualized basis over the past three months. Rieder pointed out that not only one or two components of the service sector inflation is too high, and the Federal Reserve is currently unable to cut interest rates with confidence.

Meanwhile, since the COVID-19 pandemic, the US has accumulated large amounts of savings, and these savings are currently accumulating income at higher interest rates. Rieder pointed out that this portion of revenue is being used for services such as accommodation, catering, and aviation, increasing inflationary pressure.

Regarding the federal funds terminal interest rate, Rieder believes that compared to the level of around 2% common in the past, the current terminal interest rate may be higher. “We are going to face a higher interest rate environment than in the past decade.”

The large supply of US bonds in the market puts upward pressure on interest rates, while wage growth of more than 4% makes it “quite difficult” to reduce inflation and interest rates significantly. Rieder also notes that America's “massive” immigration is helping to create an “extraordinary dynamic” in the economy that drives nominal GDP growth by expanding the labor market.

According to Rieder, all of these factors are positive for the economy. He described the US economy as “running well” and “providing employment opportunities for a large number of people.” He pointed out that as measured by the personal consumption expenditure price index, the core inflation rate is 2.8%. If nominal GDP is high, it does not constitute a crisis.

According to a report released by Yardeni Research on Monday, although real GDP growth slowed and inflation rose in the first quarter, this combination is reminiscent of “stagflation.” The current economic environment is very different from the stagflation environment in the late 1970s where economic growth was weak and inflation was out of control.

Yardeni said in another report released last Sunday that Powell is likely to repeat that the Federal Reserve “is not in a hurry to lower interest rates and is not considering raising interest rates.” The research agency said this information “will not surprise the market.”

The US stock market declined on Tuesday afternoon as investors await Wednesday's decision on interest rates from the Federal Reserve. The Dow and S&P 500 fell more than 1%, and the NASDAQ fell more than 2%.