Introduction
How much room is there for the Federal Reserve to adjust the pace of interest rate cuts? Recent revisions to economic data and various market concerns have made this question particularly noteworthy. Especially against the backdrop of a slowing global economy and trade wars, investors seem to have a pessimistic outlook on future interest rate cuts, and even Federal Reserve officials have begun to send out "cautious" signals. Want to know how the Fed's attitude affects market trends? Keep reading!
Limited Room for the Federal Reserve to Adjust the Pace of Interest Rate Cuts
With factors such as excessive revisions to US economic data, deepening market concerns about economic recession, and rising interest expenditure pressures, the Federal Reserve has limited room to adjust the pace of interest rate cuts.
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According to the CME "FedWatch," the probability of the Federal Reserve cutting rates by 25 basis points by November is 95.6%, and the probability of a cumulative cut of 50 basis points by December is 84.1%.
The Federal Reserve has made several revisions to economic data: in the data released in June 2019, the number of employed people was revised up by 423,000; in the data released in December 2018, the number of employed people was revised up by 3.703 million.
Such large revisions may affect investors' confidence in US economic statistics, thereby affecting market performance.
The inaccuracy of statistical data caused by the closure of US authorities and other reasons is also the main reason for this revision.
Under the shadow of a slowing global economy and trade wars, the market is full of worries about the prospects of the US economy, which is why it pays so much attention to US economic data.
On Monday, US stocks rose and fell collectively, with most large technology stocks rising, NVIDIA rising by more than 2%, setting a historical closing high; popular Chinese concept stocks generally fell, and the NASDAQ Golden Dragon China Index fell by 2.09%.Large technology stocks and Chinese concept stocks have shown a collective divergence, reflecting a more cautious attitude towards stock selection in the current market environment.
Nvidia has previously performed impressively in gaming and artificial intelligence, while Chinese concept stocks as a whole have been affected by factors such as trade wars and regulatory issues.
The strong performance of U.S. stocks may be related to expectations of interest rate cuts and some banks' earnings exceeding expectations. Previously, both Goldman Sachs and Citigroup released earnings that exceeded expectations.
This is also one of the theoretical bases for the Federal Reserve's "cautious interest rate cut": if the current economic data is favorable, why cut interest rates?
In the early morning of October 15th Beijing time, Federal Reserve Governor Christopher Waller said in a speech that future interest rate cuts need to be "more cautious."
Previously, the Federal Reserve had made its first significant interest rate cut in 10 years in September, directly reducing by 25 basis points, and stated that further interest rate cuts would not be ruled out in the future.
Waller's statement implies that the future interest rate cut may be smaller than in September, emphasizing that the current economic data allows the Federal Reserve to cut interest rates at an "appropriate pace."
Waller's statement deviates significantly from previous market expectations and may trigger market fluctuations.
Waller's statement also confirms the news previously released by Reuters: some Federal Reserve officials are worried that market expectations are overheating and need to be controlled by pouring cold water.
The news immediately caused a significant market shock, with investors generally worried that the Federal Reserve is "blowing bubbles" and may even use rhetoric to manipulate the market.Amidst a global economic slowdown and the shadow of trade wars, the market is filled with concerns about the prospects of the U.S. economy.
To address the risks brought about by the increased uncertainty, investors widely anticipate that the Federal Reserve will continue with an accommodative policy.
This expectation stems from the Federal Reserve's historical stance on current interest rate levels: as long as rates are above the neutral level, the Fed has a considerable scope for rate cuts.
However, over the past two years, the Federal Reserve has been normalizing monetary policy through continuous rate hikes and balance sheet reduction, bringing rates close to the neutral level.
Waller's recent statement implies that although the Federal Reserve has a considerable scope for rate cuts, it does not mean they will necessarily use it all.
The latest revision of the employment data by the Department of Labor is a new move following the previous revision.
In mid-August of this year, the Department of Labor announced a downward revision of 818,000 new jobs added over the year ending March.
This is also one of the reasons why the market doubts the mechanism by which the Federal Reserve relies on data for decision-making: historically, the Fed has repeatedly adjusted interest rates in response to data changes.
However, statistical bureaus and departments like the Department of Labor also make data revisions based on actual situations, and inaccurate statistics cannot support a true reflection of the actual economy.
The exchange rate of the Chinese yuan against the U.S. dollar fluctuated and rebounded on the morning of October 15th, with the U.S. dollar falling to around 7.077 per offshore yuan.After the Eastern power announced a preliminary agreement on trade negotiations, the market widely expected a significant appreciation of the Chinese yuan exchange rate. However, the actual exchange rate of the yuan against the US dollar did not rise significantly, mainly due to the influence of the central bank's pricing mechanism.
Amid a slowing global economy and the shadow of trade wars, the market is filled with concerns about the prospects of the US economy. But Waller's recent remarks suggest that the current interest rates are close to a neutral level, not the "unlimited rate cuts" widely expected by the market.
At present, there is a widespread dependence on central banks globally: as soon as the central bank releases liquidity, the market surges forward, and once the central bank tightens its policy, it triggers a wave of selling.
This situation has seriously affected the market's inherent pricing function, and the central bank's liquidity release will only increase market uncertainty.
In conclusion, the Federal Reserve's cautious attitude has cooled the market's expectations for interest rate cuts. Although there is room for rate cuts, it does not mean that it will "release liquidity" as everyone wishes. This phenomenon of over-reliance on central banks is indeed worth our deep reflection. What do you think about how the Federal Reserve's future interest rate cut policy will affect the market?