Currently, the Federal Reserve is holding the FOMC meeting, with the interest rate decision expected to be announced at midnight on the 13th. The market currently anticipates a high probability of keeping rates unchanged, with more focus on whether Federal Reserve officials will lower their interest rate cut expectations. In this regard, analysts at HSBC point out that the hawkish attitude of the Federal Reserve may be a good entry point for buying risk assets.
Key points of the FOMC meeting are the interest rate dot plot
HSBC analysts: Federal Reserve’s hawkish stance is a good buying opportunity
Market has high uncertainty about Fed information
At the Federal Reserve’s interest rate decision meeting in early May, the federal benchmark interest rate was maintained in the range of 5.25% to 5.5%, achieving a sixth consecutive freeze. Currently, the Federal Reserve is holding the Federal Open Market Committee (FOMC) meeting and is expected to announce the latest interest rate decision at midnight on the 13th.
According to CME Fedwatch data, the probability of keeping rates unchanged is as high as 99.4%. However, most analysts estimate that there will be more Federal Reserve officials lowering their expectations for the number of interest rate cuts this year, moving the median of a 0.25 percentage point rate cut from 3 times to 2 times, or even fewer. Therefore, the focus is more on the “interest rate dot plot.”
In addition to the interest rate decision, the important inflation measure “U.S. May Consumer Price Index (CPI)” data will also be released today at 20:30. Nick Timiraos, a Wall Street Journal reporter known as the “Federal Reserve megaphone,” stated that dovish and hawkish officials currently agree to continue watching, and CPI will determine whether the expected number of rate cuts this year is once, twice, or not at all.
The US April Consumer Price Index CPI (month-on-month) was 3.4%, and this prediction is also 3.4%. If tonight’s data can maintain this value or lower it, the pressure of inflation on the Federal Reserve is expected to relax.
On the other hand, analysts at HSBC Bank pointed out that there are some hawkish risks in this interest rate decision meeting. Nevertheless, it is not expected that the subsequent interest rate fluctuations will return to the levels of last year, and the weak performance of risk assets will be temporary.
Therefore, the hawkish attitude of the Federal Reserve may provide a good entry point for investing in risk assets.
Furthermore, the Federal Reserve’s attitude towards suppressing inflation is becoming increasingly firm. Federal Reserve Chairman Powell has emphasized multiple times the need to lower the inflation rate to 2%. However, in the current high-interest-rate environment, nearly 300 banks in the United States are facing bankruptcy pressure, and consumers are forced to change their past consumption habits.
Hence, the market eagerly anticipates the Federal Reserve to implement interest rate cuts as soon as possible. However, the Federal Reserve seems to be using “technical jargon” that the public does not understand to express the current overall economic situation, with the most commonly used term being the “Neutral Rate.”
As the Neutral Rate cannot be directly observed, most people cannot understand the significance that the Fed wants to convey. In short, the Neutral Rate is not a useful tool for explaining monetary policy to the public.
“Neutral rate” is also known as the long-term equilibrium rate, natural rate, internally referred to as r-star or r*, which is the short-term interest rate in a fully employed and stable economy with currency inflation. The Neutral Rate is not set by the Federal Reserve and is usually discussed in real terms, excluding inflation factors. In addition, the Neutral Rate cannot be directly observed and can only be estimated.
Moreover, since the market is focused on Powell’s emphasis on the 2% inflation target, and there is no mention of a 2.5% to 3% inflation rate from the Fed or media articles, it will not disrupt the market economy. Therefore, whenever the market hears that the inflation rate exceeds 2%, it will consider that the Fed’s policy has not achieved its goal, leading to market panic.
Perhaps the Fed can use easily understandable terms to convey information to the public and communicate correct economic concepts, which can prevent the market from falling into panic due to incorrect speculation.