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As 2024 approaches, it remains a huge unknown for markets and economists as to when the U.S. Federal Reserve (Fed) will begin cutting interest rates. The minutes of the last monetary policy meeting of the Federal Open Market Committee (FOMC) last year will be released at 3 a.m. Taiwan time on Thursday (4th). Some analysts believe that the market may be waiting for a hawkish record to convey that the central bank is “not in a hurry to act.” signal.

According to the forecast released by the Fed at its last meeting, most officials estimate that as inflation steadily drops to the 2% target, the policy interest rate will need to be lowered by at least 0.75 percentage points this year. There will be three interest rate cuts this year, and the federal funds rate will be reduced from the current 5.25%. The -5.5% level was lowered to around 4.6%.

Some traders even believe that the Fed will cut interest rates up to 7 times this year, with a cumulative rate cut of 1.75 percentage points, more than twice the above-mentioned Fed prediction. However, most analysts believe that the minutes of the December monetary policy meeting have a high chance of pouring cold water on investors. The Fed does not want its achievements in cooling inflation to be stifled by market expectations of cutting interest rates too quickly.

Some analysts pointed out that the Fed may use the minutes of this meeting to send a signal of “no rush to action”, highlighting the cautious and restrained stance of hawk members before cutting interest rates. On the other hand, Fed Chairman Jerome Powell insisted at a press conference after the meeting in mid-December that interest rate cuts were not yet a topic of discussion, casting doubt on the timing of the first rate cut this year.

According to the CME Group FedWatch Tool, the market generally believes that the Fed will cut interest rates for the first time in March this year, but economists believe that the Fed will postpone it until around the middle of the year.

Tim Duy, chief U.S. economist at SGH Macro Advisors, believes the Fed’s direction is clear because falling inflation is driving it to cut interest rates. He noted that the combination of slowing inflation and a stable federal funds rate means that while inflation is easing and job market growth is expected to slow, monetary policy is actually becoming more restrictive.

Duy also said that while the minutes were “unlikely to point directly” to the rate cut currently expected by investors in March, they could show the Fed is increasingly convinced that the Fed is on the path to price stability.

The market may be waiting for a hawkish meeting record

The steady decline in inflation has fueled optimism within the FOMC, but not all members share the same view. Some analysts believe that since the meeting minutes will undergo revisions before being finalized, the editors may focus on describing the key message they want to convey, that is, “no rush to action.” It is expected that this report will highlight the hawkish members’ efforts before cutting interest rates. Maintain a cautious and restrained stance.

All in all, what the market is waiting for may be a hawkish meeting minutes, which may trigger a “risk aversion” sentiment in the market, which will be bullish for the US dollar and bearish.gold。

But the impact may not last long. First, there is still considerable optimism about the soft landing scenario. Secondly, the market has reservations about the Fed’s forecast. The Fed was very late in admitting that inflation is not temporary, and may be very late in admitting that it has done enough or even too much.

Finally, as the Fed has always emphasized its reliance on data, the market believes that unless the data highlights a new inflationary trend, there is no reason to fear hawkish statements.

Data disclosure policy is taking a turn

In fact, the data released since the Fed’s monetary policy meeting, as well as the data expected by policymakers at the December 12-13 meeting last year, have shown a strong shift in the direction of interest rate policy.

The overall personal consumption expenditures (PCE) price index fell in November; excluding volatile food and energy costs, core PCE grew less than 1% on an annual basis. In the six months from June to November, core PCE inflation was just below the 2% target – a fact that some analysts pointed out may lead to a rate cut by the Fed sooner or later.

Fed Chairman Powell pointed out at the last press conference that interest rates need to fall before inflation returns to the 2% target, because otherwise it will be too late and policies will be more stringent – and the risks to the job market will be greater. ——Not necessary.

Deutsche Bank economists said in an analysis of the Fed’s policy scenario this year that the Fed will start cutting interest rates in June, but if inflation data is weaker than expected, it would be reasonable to cut interest rates for the first time as soon as March.

The Fed’s next monetary policy meeting will be held on January 30-31, and the subsequent US job market and inflation data will determine the final outcome. The United States will release job vacancy data later on Wednesday (3rd), the latest non-farm payrolls report will be released on Friday (5th), and last week there will be a heavyweight consumer price index for December last year.

2024-01-03 12:59:26
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