CITIC Securities: The Fed's interest rate hike in September is in line with expectations, and oil prices will become a critical next 25 bps rate hike during the next critical year

The Zhitong Finance App learned that CITIC Securities released a research report saying that the Federal Reserve raised interest rates by 25 bps as scheduled in September to raise this year's growth and inflation forecasts. The bitmap and Walsh's statement both sent hawkish signals. Strong expectations and pressure from the market made raising interest rates a smooth choice for the Federal Reserve. The pace and magnitude of the Fed's subsequent rate hikes will largely depend on oil prices. This is difficult to predict, but given that the overall inflation rate may decline markedly at the beginning of next year, the reasons for continuing to raise interest rates should weaken at that time. The bank expects the Federal Reserve to raise interest rates by another 25 bps during the year, and may remain on hold next year. Financial conditions in the US are currently difficult to meaningfully ease, and in a growth narrative, we should look for assets that are supported by fundamentals rather than just benefit from liquidity.

CITIC Securities's main views are as follows:

The Federal Reserve raised interest rates by 25 bps as scheduled in September, raising this year's growth and inflation forecasts. The bitmap and Walsh's statement both sent hawkish signals.

The Federal Reserve raised interest rates by 25 bps to the 3.75% to 4% range as scheduled in September. The resolution passed with a full vote. The statement stated that this rate hike would support inflation to return to the 2% target in a more timely manner (timelier). The median federal funds rate forecast for this year's bitmap is 4.1%, up from 3.8% and 3.6% in June. Of the 18 officials, 12 are expected to raise interest rates by 25 bps during the year, and 4 are expected to raise interest rates by 50 bps during the year. There is a marked increase from the previous bitmap where only 6 people expect this year's interest rate range to be higher than 4%. The Federal Reserve Economic Forecast Summary The real GDP growth forecast for this year and next two was raised by 0.1 ppts to 2.3% and 2.4%, respectively, the unemployment rate forecast for the next three years was lowered to 4.1%, and the overall and core PCE inflation expectations for this year were raised by 0.1 ppts to 3.7% and 3.4%, respectively. The bank believes that these changes reflect the Fed's optimism about the resilience of the US economy and concerns about the continuation of high inflation. Walsh said that the resolution removed part of the easing, saying that the FOMC has no confidence in a fall in inflation and there is almost no sign that the inflation trend has passed the test. When asked by reporters why the interest rate hike is effective in impacting energy supply, he said that although the Fed cannot influence a single price, it will ensure that any price changes do not spill over to other sectors and have no second-order or third-order effects on the economy.

The market had fully anticipated this rate hike before the meeting, and expectations for liquidity tightening increased slightly after the meeting.

Prior to the announcement of this resolution, CME FedWatch showed that the market expected the probability that the Fed would raise interest rates this month was close to 90%, and that interest rates would be raised four times by the first half of next year. Such strong expectation pressure has clearly made the steady stream of interest rate hikes the most secure choice for the Federal Reserve. As the price of oil broke 100 again, the market also gradually accepted the expectation that September might be the starting point for a new round of interest rate hikes by the Federal Reserve. After the hawkish guidance of this meeting, the two-year US bond yield broke through 4.7%, the 10-year US Treasury yield returned above 5%, and the price of gold fell below the 4,300 US dollar per ounce mark. Walsh attributed the recent rise in interest rates on long-term bonds to three major factors: strong economic growth in the US, capital competition for cloud factory financing, and geopolitics disrupting energy food prices.

Look for growth, not relaxation.

The pace and magnitude of the Federal Reserve's subsequent interest rate hikes will largely depend on oil prices. However, the steady and not overheated labor market does not support the strengthening of the spiral of wage increases and price increases. The four-year increase in the vacancy rate also indicates that the momentum for rent inflation is moderate. Therefore, the risk of secondary inflation caused by energy shocks is small. The overall inflation rate may decline significantly year-on-year at the beginning of next year, and the reasons for continuing to raise interest rates will weaken at that time. The bank expects the Federal Reserve to raise interest rates by another 25 bps during the year, and may remain on hold next year. At a level where oil prices currently slightly exceed $100 per barrel, which is insufficient to generate recession expectations but is sufficient to deepen inflation concerns, it is difficult to meaningfully ease dollar liquidity. Therefore, interest rates on long-term bonds do not have clear downside, wait for the Middle East conflict to cool down, have a right-side layout or better choice. The short-term rebound conditions for gold are weak, and attention should be paid to the pace of trading. The US dollar index is supported and fluctuates around 100 during the year. The situation in the Middle East, expectations of interest rate hikes, and the midterm elections continue. US stocks may maintain a state of general sideways fluctuations in the near future, but under growth narratives, they may be assets that are relatively easy to forge consensus, and a dips layout can be considered.

Risk factors:

The evolution of the situation in the Middle East or the impact of energy shocks exceeded expectations; the Fed's inflation tolerance fell short of expectations; the Fed's policy ideas exceeded expectations; and changes in market liquidity and sentiment exceeded expectations.