The Federal Reserve's interest rate meeting in July has drawn external attention. The market speculates on what decision the Federal Reserve, which has entered the "last mile" of this round of interest rate hikes, will make: whether to keep the policy interest rate unchanged, waiting for more economic data for subsequent judgment; or to raise interest rates by another 25 basis points.

At the monetary policy meeting on July 31, the Federal Reserve announced that it would keep the target range of the federal funds rate unchanged at 5.25% to 5.5%, "If the fight against inflation continues to make the desired progress, the Federal Reserve may announce a rate cut at the meeting in September this year."

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After the news was released, the three major U.S. stock indexes opened and closed high, with the S&P and Nasdaq gains reaching the highest in five months. The S&P 500 index rose more than 2% during the session, and the Nasdaq once rose more than 3%, both achieving the best single-day performance since February.

Keeping interest rates unchanged

As the market expected, the Federal Reserve released a "dove" signal at the July monetary policy meeting, and the market also "danced and reveled" accordingly.

Since the start of this round of interest rate hikes in March 2022, the Federal Reserve has raised the target range of the federal funds rate from near zero to 5.25%-5.50% at a speed unprecedented in more than 40 years, reaching the highest level in 23 years.

After a cumulative increase of 525 basis points, the Federal Reserve's tightening policy has led to a decline in U.S. inflation from its peak. However, some economic activities in the United States have not cooled down as expected, which has increased the complexity of the Federal Reserve's formulation of subsequent policies.

Previously, the market had been expecting that under the tightening policy of the Federal Reserve, U.S. inflation would continue to decline, and the Federal Reserve would cut interest rates three to four times within 2024 before the U.S. economy fell into weakness.

However, the consumer price index (CPI) exceeded market expectations and previous values, causing this expectation of interest rate cuts to suddenly decline. The market currently expects that the number of interest rate cuts by the Federal Reserve this year will be reduced to one to two times, and the first interest rate cut time will also be postponed. The high interest rate policy environment in the United States may last longer, and some investors even expect that the policy prospect tone of the Federal Reserve preparing to start interest rate cuts may be reversed.Inflationary pressures are primarily driven by rising housing prices and gasoline costs, with the latter potentially experiencing further seasonal increases. Recently, the United States has also seen new inflationary factors such as rising electricity prices due to increased investment in AI research and development. These risks of rising inflation offset the disinflationary factors brought about by the recovery of global supply chains.

While inflation remains resilient, economic indicators such as U.S. employment and consumer spending have remained moderately strong. Many Federal Reserve officials have recently signaled in public speeches that they are not in a hurry to cut interest rates.

In his last speech before the interest rate meeting, Powell sounded dovish, stating that the Fed has been receiving good data that adds to confidence. In contrast, Federal Reserve Governor and "big hawk" Waller, who has emphasized the need for high interest rates to ensure a回落 in inflation for two years, changed his stance, indicating that a rate cut is imminent as long as there are no significant surprises in inflation and employment.

Against the backdrop of persistently higher-than-expected inflation in the United States, continued strong economic data indicators, and a strengthening dollar that has triggered global currency market fluctuations, the market is particularly interested in the Fed's judgment and stance on the future of U.S. inflation and interest rates.

In its monetary policy statement on July 31, the Fed acknowledged some progress in achieving its 2% inflation target in recent months. At the same time, the Fed removed the long-standing phrase "closely monitoring inflation risks" from its policy statement, replacing it with an acknowledgment that policymakers are now "monitoring risks to both sides of their dual mandate."

Meanwhile, the Fed announced that it would keep the target range for the federal funds rate unchanged at 5.25% to 5.5%. The market responded positively to the change in the Fed's attitude.

On July 31, U.S. stocks closed higher across the board. The Dow Jones Industrial Average rose by 99.46 points, or 0.24%, to 40,842.79; the S&P 500 increased by 1.58% to 5,522.30; and the Nasdaq Composite surged by 2.64% to 17,599.40.

The Fed's rate cut is imminent.

Continuous interest rate hikes have made U.S. interest costs very expensive. Coupled with the division between the two parties in the U.S. Congress, which has led to a stalemate in raising the debt ceiling and introducing the fiscal year 2024 budget, rating agencies Fitch and Moody's have downgraded the U.S. long-term rating, warning of the severity of U.S. fiscal issues.

It is worth noting that second-quarter GDP data show that the U.S. economy still has resilience. On July 25, the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce released its first preliminary estimate, showing that the U.S. real gross domestic product (GDP) grew at an annual rate of 2.8% in the second quarter of 2024, far exceeding market expectations of 2% and significantly higher than the first quarter's 1.4%.Recently, there have been frequent signals of a slowdown in the U.S. economy. The latest indicators suggest that job growth is slowing down, and the unemployment rate is rising but still remains low. Over the past year, inflation has eased somewhat, but it is still slightly higher.

The Federal Reserve's July Beige Book indicates that from late May to early July, economic activity in most regions of the United States maintained a slight to moderate growth. The number of regions reporting flat or declining economic activity increased by three compared to the May Beige Book. The report also stated that U.S. economic growth is expected to slow down in the next six months.

Given the unpredictability of the neutral interest rate and the lag effect of monetary policy on economic activity, the Federal Reserve also finds it difficult to determine whether the current monetary policy has reached a sufficiently restrictive level, and whether the previously accumulated tightening policies have fully taken effect on economic activity.

This also makes it more difficult for the Federal Reserve to weigh the risks between monetary policies at present. If the degree of policy tightening is not enough to curb inflation, it will require a higher cost to combat persistent inflation; however, if the policy is overly tightened, it may cause unnecessary damage to the economy. Due to a series of recent employment data showing that the supply and demand in the U.S. labor market are becoming more balanced, some industry insiders firmly bet that the Federal Reserve will keep the policy interest rate unchanged.

JPMorgan Chase CEO Jamie Dimon展望s that future U.S. interest rates may range from 2% to 8%, as the United States has a large number of inflationary factors, including continuous fiscal spending, global remilitarization, global trade structure adjustment, capital demand for the new green economy, and so on, and these factors will continue.

In the view of JPMorgan's Chief U.S. Economist Michael Feroli, the Federal Reserve will not rashly lower interest rates during the sensitive phase when the 2024 U.S. election enters the second half. Since there was no rate cut in July, the Federal Reserve may have to wait until December—that is, after the presidential election—to lower interest rates.

Nomura's Global Macro Head, Lewis Alexander, judged that the United States' disinflation process has returned to the right track, and the U.S. economic growth has also cooled down, which will make the Federal Reserve more willing to start a rate-cutting cycle. Nomura currently predicts that the Federal Reserve will cut interest rates once in September and December of 2024, and cut rates by 100 basis points in 2025.

After weighing various factors, although inflation has not yet dropped to the Federal Reserve's target level, the market tends to believe that at some point in 2024, the Federal Reserve will inevitably start to lower interest rates.