CICC: The Fed's rate hike is not over, but there is no need to rush

The Zhitong Finance App learned that CICC released a research report saying that the Federal Reserve stood still in October, and that policymakers are firm in their stance against inflation, but they also believe that the policy can be patient. Some hawkish officials turned to wait and see, indicating a decline in the urgency of continuing to raise interest rates. Since the interest rate hike in September, US financial conditions have been marginally tightened, and the inflation premium has declined somewhat. The Federal Reserve can wait for the effects of the policy to be further revealed. Looking ahead, it is expected that interest rates will be raised again in December, and then continue to wait and see. This round of rate hikes is more likely to be a round of gentle, gradual adjustments rather than aggressive austerity.

Furthermore, Walsh announced that interest rate voting frequency will be reduced starting next year, and some meetings will be dedicated to discussing long-term monetary policy strategies. This is also a continuation of the reform of the Federal Reserve's policy framework since he took office. As far as the market is concerned, the risk that the Fed will exceed expectations in the short term has declined, but it will maintain a tight monetary position in the medium term.

CICC's main views are as follows:

The Federal Reserve's October interest rate meeting kept the policy interest rate unchanged at 3.75% to 4.0%, in line with market expectations. The resolution was passed 10-2. Cleveland Federal Reserve Chairman Hamak and Federal Reserve Governor Cook voted against it, advocating a 25 basis point increase in interest rates.

CICC believes that the core signal released by this conference is that the task of fighting inflation is not over, but monetary policy can be patient. The Federal Reserve did not change its anti-inflationary stance; instead, after raising interest rates in September, it chose to observe the effects of early austerity before deciding on the next steps. This is neither a policy shift, nor does it mean that the Federal Reserve is falling behind the curve; rather, monetary policy is shifting to a more prudent approach.

First, the anti-inflationary stance remains firm. According to the monetary policy statement, US economic activity is expanding at a “strong (strong)” rate (the wording at the previous meeting was “steady (solid)”), but inflation is still high. The Federal Reserve's commitment to achieving the 2% inflation target is unwavering.

However, judging from the voting results, some hawkish officials have turned to wait and see. Dallas Federal Reserve Chairman Logan and Minneapolis Federal Reserve Chairman Kashkari, who have supported interest rate hikes since July, did not vote for interest rate hikes at this meeting. This shows that even within the hawkish camp, there is disagreement about whether it is necessary to raise interest rates again immediately. At the same time, the policy statement emphasized that “the accumulation of more information will help the Commission determine appropriate policy positions”. This indicates that the Federal Reserve wants more data support before taking the next step.

Second, interest rate hikes in September have already had some effect, and the Federal Reserve can wait for the effects of austerity to show further. Walsh pointed out at the press conference that since the interest rate hike in September, US credit spreads have widened and financial conditions have been marginally tightened. At the same time, inflation risk premiums have declined, and even when oil prices have risen, US bond yields have not risen sharply. This shows that early policy actions have already taken effect through the financial market. Considering that there is a time lag in the transmission of monetary policy, there is a reason for the Federal Reserve to suspend interest rate hikes and wait and see.

Third, the Federal Reserve has proven its policy independence through practical actions; there is no need to further strengthen its policy credibility. Before the September meeting, the market had doubts about the Federal Reserve's and Walsh's own determination to fight inflation, but after the September rate hike, this concern has clearly abated. Despite the fact that the Federal Reserve remains on hold at this meeting, two officials have voted to raise interest rates. This shows that even as the midterm elections approach, some officials insist on making judgments based on the economic and inflation situation rather than catering to the political cycle. This signal will also help strengthen the credibility of the Federal Reserve.

Walsh's statement on America's productivity prospects is also noteworthy. He pointed out that the real GDP growth rate of the US has been revised from 1.8% to 2.4% in the first half of this year, and GDP growth may accelerate further in the third quarter. At the same time, the economy is also beginning to show signs of improving productivity. This judgment has important implications: if a strong economy is due to increased productivity and a rise in potential growth rates, then faster GDP growth does not necessarily mean that the economy is overheated or inflationary pressure has increased dramatically, and the Federal Reserve does not necessarily need to raise interest rates continuously.

Furthermore, the adjustment of the conference mechanism is another step in Walsh's push for reform. Walsh announced that the FOMC meeting schedule will be adjusted: in 2027, it will still maintain eight meetings a year, but one of them will be dedicated to discussing long-term monetary policy strategies and will not vote on interest rates or issue policy statements; the 2028 plan will be increased to two strategic meetings, while interest rate decision meetings will be reduced to six. This adjustment continues Walsh's reform ideas on the Federal Reserve's policy formulation and communication methods since taking office, hoping to reserve more room for discussion on medium- to long-term issues such as changes in economic structure, productivity, and monetary policy framework. Fewer interest rate voting also means that policy decisions will be based on a fuller accumulation of information.

CICC believes that the Federal Reserve's current policy position is generally appropriate; it is neither clearly behind the inflation situation nor excessive austerity. The benchmark situation for CICC is to raise interest rates again in December and then continue to wait and see. Overall, this round of interest rate hikes is more likely to be a gentle, gradual adjustment rather than a stormy cycle of austerity. Continued interest rate hikes will likely also be based on the sound fundamentals of the US economy, and may not cause a significant slowdown in aggregate demand.

As far as the capital market is concerned, the risk from the Federal Reserve's tightening beyond expectations may have declined in the short term. Even if the next economic data continues to be strong, it only proves that the Federal Reserve needs to raise interest rates again in December, and this is within market expectations. In the medium term, the US economy is still in an upward cycle, and growth momentum is steady. CICC believes that this means that the Federal Reserve is likely to maintain a tight monetary position in the next six months, and the possibility of shifting to easing is low.