DBG - The Federal Reserve may maintain interest rates unchanged tomorrow morning. What is the probability of raising interest rates again this year?

The Federal Reserve's September interest rate decision will be ushered in the early morning of Beijing time tomorrow (Thursday). The market generally expects the Federal Reserve to hold its ground, but it will be concerned about whether it will release new signals on future interest rate policy.

After raising interest rates by 25 basis points in July, the target range for the federal funds rate in the United States is already at 5.25% -5.5%, the highest in 22 years. The latest inflation data in the United States showed that the CPI rose 3.7% year-on-year in August, slightly higher than the market expectation of 3.6%, and the previous value was 3.2%; the core CPI rose 4.3% year-on-year, the same as the market expectation, and the previous value was 4.7%.

The market generally expects the Federal Reserve to keep interest rates unchanged

"This meeting can basically confirm that the Federal Reserve will keep interest rates unchanged, which is also the general expectation of the market. Mainly because the two most important indicators in policy decision-making - core inflation and labor market indicators have shown a continuous cooling trend recently, coupled with weak real consumer demand, the need for another interest rate hike in September is not high." Bai Xue, an analyst at Dongfang Jincheng Research and Development Department, analyzed to The Paper.

DBG ForexIt is believed that in terms of inflation, although the US CPI rebounded in August, it was mainly due to the rise in international oil prices and seasonal factors on gasoline prices, energy services and related transportation service inflation. Core commodity inflation and housing inflation continued to decline month-on-month, indicating that the general trend of continued slowdown in US core inflation has not changed.

In terms of the labor market, the US non-farm job market continued to cool in August, the unemployment rate rose faster than expected, and the monthly growth rate of hourly wages fell faster than expected. In addition, the number of job vacancies fell rapidly in July, and the employment gap narrowed significantly. This further confirmed the cooling trend of the labor market.

In addition, the August consumption data also supports the suspension of interest rate hikes. The increase in retail sales in August was mainly driven by the rise in oil prices, while the actual consumption demand of residents was relatively weak. The growth rate of retail, leisure and service consumption all fell in August. If the impact of oil prices is excluded, the growth rate of retail sales is only 0.2% month-on-month, which is lower than the growth rate of 0.5% in July. Therefore, the Federal Reserve will skip raising interest rates this month and adopt a wait-and-see policy stance.

Hu Jie, a professor at Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University and a former senior economist at the Federal Reserve, said that from the perspective of CPI, it reached 3% in June, and then rebounded to 3.2% in July and 3.7% in August, mainly due to the recent rise in oil prices. Core CPI has fallen all the way to 4.3% in August since 5.6% in March, and there is a trend of accelerating decline. In summary, excluding the factor of oil prices, prices are in a relatively stable downward channel. The recent rise in oil prices is worthy of attention, but it is greatly affected by policy and has high volatility. Although there is a current increase, it is still at the level before the conflict between Russia and Ukraine. Without a more drastic increase, it should not affect the policy rhythm of the Federal Reserve's inflation control.

DBG Macro expects that the Federal Reserve will hold its ground and maintain interest rates unchanged, but the interest rate hike cycle may not end; Federal Reserve officials may significantly raise their forecasts for GDP growth by the end of 2023, slightly raise their forecasts for overall PCE inflation, and point to a dot plot that points to another interest rate hike in the fourth quarter, although the number of people who support further interest rate hikes will decrease from June; Powell may continue the Jackson Hole meeting and will not prematurely declare anti-inflation victory. He may also, like European Central Bank President Lagarde last week, suggest that policy rates will stay high for a long enough time. In addition, last week, Bank of Japan Governor Ueda said that he would consider withdrawing from negative interest rates. If the three major central banks in the United States, Europe and Japan point to higher interest rates for longer, then US bond yields may still have room to rise.

Powell's recent remarks seem to send a "hawkish" signal?

At the end of August, Federal Reserve Chairperson Jerome Powell said at the Jackson Hole Economic Symposium that he was prepared to raise interest rates further if the circumstances were right and intended to maintain monetary policy at a restrictive level until he was confident that inflation was falling steadily towards the target.

DBG Forex says this is the Fed's typical normal response: it will keep interest rate pressure on and market expectations within the boundaries of high interest rates until the 2 per cent inflation target is met. So there is no need to read too much into this seemingly hawkish statement. He believes that the current high interest rates have established a downward channel for inflation, and in a few months, inflation will be close to or even reach the ideal level of 2% by the middle of next year. In the meantime, there should be no further interest rate hikes without particularly unexpected economic data.

DBG FX believes that on the surface, Powell's speech at the Jackson Hole meeting was slightly hawkish compared with the signals since the July meeting, but in fact it revealed a subtle dovish tendency. The "hawkish" part is mainly reflected in Powell's mention that the economy may not cool down as scheduled and exacerbate the risk of inflation, indicating that the Federal Reserve retains policy space for further interest rate hikes. But Powell began and ended his speech by saying that the Fed would "proceed cautiously." For the first time, he explicitly acknowledged progress in the decline of "super-core" inflation other than housing - the most sticky category of inflationary pressures - and repeatedly suggested that real interest rates had reached restrictive levels, and that the long lags in the impact of monetary policy meant that the Fed lacked a strong will to continue to raise interest rates. Overall, therefore, Powell's remarks were more about explaining the uncertainty facing current policy and reiterating the late "data-dependent" decision-making model. The hawkish part of the statement still serves as more of an expected guide, and the actual possibility of landing is relatively limited.

What will be the future of inflation and the economy in the United States, and is there any possibility of interest rate hikes this year?

DBG Forex said that, as mentioned earlier, oil prices are the reason for the increase in the current year-on-year growth rate of CPI, while the comprehensive price of other goods and services, that is, the growth rate of core CPI, is showing a stable downward trend. Therefore, the Federal Reserve is likely not to raise interest rates now, but will further observe the price impact of oil prices on the overall economy. The current world economic growth rate is generally slowing down, and the rise in oil prices lacks sustained momentum. "I think the impact of oil prices on inflation is still manageable. There is a possibility of raising interest rates again this year, but it is less than 50%."

DBG foreign exchange macro expects that the Federal Reserve will maintain the policy rate unchanged in the range of 5.25% to 5.5% this week, but the dot plot may point to another interest rate hike in the fourth quarter. According to the dot plot in June, there are 12 officials who support two interest rate hikes in the second half of the year. At present, one interest rate hike has been completed in July, and the probability of a rate hike in September is small. According to the dot plot, another interest rate hike may theoretically occur in November or December. The question now is whether any of the officials who previously supported two interest rate hikes in the second half think that there is no need to raise interest rates again? We think there may be 1-2 people, and the number of people who support a further rate hike above 5.75% may also decrease (three people previously thought that a rate hike should be raised above that level, one of them was former St. Louis Fed President Brad, who left in July). This means that the number of officials supporting a further rate hike in the fourth quarter in the new dot plot may be reduced from 12 in June.

DBG foreign exchange said that looking ahead, the global crude oil supply is still tight, which may lead to repeated follow-up energy inflation, thus restricting the overall CPI inflation rate of decline. It is not ruled out that there will be a possibility of higher prices in the fourth quarter. However, the trend of core CPI and CPI may diverge. Considering the easing of the global supply chain and the improvement of used car inventories in the United States, used car prices may remain depressed, and core commodity inflation will continue to decline. Coupled with the recent tightening of financial conditions and the accelerated cooling of the labor market, core CPI may continue to decline by the end of the year, but the rate of decline may be slower.

DBG FX believes that even if the September dot plot may show another rate hike before the end of the year, it does not mean that this time the rate hike will be realized. However, the possibility of an additional rate hike by the Federal Reserve at its November/December meeting cannot be ruled out if inflation unexpectedly rises more than expected. In addition, even if the rate hike is stopped, the high interest rate environment is expected to continue until at least the first quarter of next year, and the probability of interest rate cuts in the short term is low.