ATFX-Powell is determined not to let go, the Federal Reserve's interest rate hike has not reached the end?

In addition to the hype surrounding artificial intelligence, one of the overarching themes driving the U.S. stock market rally this year has been investors' fervent bets on the Federal Reserve announcing the end of its rate hike cycle, but that optimism has been damaged.

There is little doubt that the Fed's mandate to curb inflation is drawing to a close. With food and energy prices falling sharply, overall consumer price pressures are easing rapidly. July headline inflation rose 3.2 per cent year on year, a far cry from June's 9.1 per cent and close to the Fed's 2 per cent target.

But there are still several obvious obstacles before the Fed declares victory in the fight against inflation.

For the first time, the core personal consumption expenditures (PCE) index, the Fed's preferred measure of inflation, fell to 4.1% from a peak of 5.4% in February 2022, still double the Fed's target.

Second, while job growth is not as strong as it was a year ago, August will still add 170,000, which would mean more than 25 million additional non-farm payrolls since the peak of the COVID-19 pandemic in April 2020.

Crucially, Federal Reserve Chairperson Jerome Powell has once again reinforced the mantra of "keep interest rates high for longer", which has set the tone for much of the communication he and other Fed colleagues have had this year, regardless of market participants' bets.

While some asset managers remain convinced that the Federal Reserve is at the end of its rate hike cycle, speculators are reluctant to take such risks. For the week ending August 22, data from the Commodity Futures Trading Commission (CFTC) showed that non-commercial market participants (typically speculative money, including speculative funds and individual investors)Increased net short positions in two-year Treasury futures to the highest level since at least 1990Speculators are betting that US two-year Treasury yields will continue to rise.

The money market shows that,Traders believe the Federal Reserve will raise interest rates again this yearThat would lift the target range for the federal funds rate from the current 5.25-5.50 per cent to 5.50-5.75 per cent. Just three months ago, markets were betting that the Fed would cut rates at least once this year.

Yields on US two-year Treasuries, the most sensitive to changes in the Fed's monetary policy expectations, posted their biggest weekly gain in two months last week after Mr. Powell spoke at the annual economic policy seminar in Jackson Hole.

Powell has vowed to exercise caution on rate hikes and will rely on upcoming data, butHe is very determined to achieve his ultimate goal"It's the Fed's job to get inflation down to 2 percent, and we'll do it," he said.

atfxAnalysts believe that...Powell's speech in Jackson Hole generally conveyed very limited new information, and the market has anticipated and reacted to most of the results in advance. Although the Federal Reserve's interest rate hike in September is less likely, butHis remarks left some room for a rate hike in November.The current market expectation for a rate hike in November is 62%, and it has been fully priced before the speech.

It is worth noting that Powell reiterated the importance of "data-driven" policy, which also makesThe US PCE inflation data released on Thursday, the non-farm payrolls data released on Friday, and the CPI data on September 13 are particularly importantAll three, as macro event risks, could affect interest rate expectationsforeign exchange marketThe performance of.

The dollar, which economist Mohammed El-Erian described earlier this year as the "cleanest dirty shirt" among global currencies, is expected to gain 2 per cent in August, its strongest monthly performance since May, thanks in large part to expectations that the Federal Reserve will raise interest rates at least once more before the end of 2023.

At the same time, after July CPI data and market expectations for future CPI, etc., show that US inflation has eased, real interest rates remain at a high level of around 2%. The key to the Federal Reserve tightening financial conditions through real interest rates is timing. The current macro data and high real interest rates, which are partially below expectations, are positive signals for inflation to subside, injecting confidence into risk markets such as US stocks.

However, if the Fed keeps real interest rates at a high level when market demand falls sharply, it could amplify the negative impact on the economy, leading to a mild recession. At that point, the stock market may lose its capital support and investors will turn to long volatility. In response, the Fed will lower interest rates and implement quantitative easing to adjust real interest rates to a new equilibrium level. At this point, a complete cycle of monetary policy intervention is over, and how the Fed keeps real interest rates relatively high after inflation is reduced, preventing potential deflationary effects, is a question worthy of investors' attention.

Market expectations for future CPI in the United States, data source: Bloomberg Terminal

Andrew Hunt, an analyst at Capital Economics, said in a note that while Mr. Powell said rates could rise further, inflation could come down unexpectedly, avoiding another rise. He expects the federal funds rate to fall from its current 5.25-5.5 per cent to 3.25-3.5 per cent by the end of 2024.