The latest voice from the Federal Reserve.
Federal Reserve Governor John Waller, the favourite to be the next Fed chairman, warned on Friday that the factors driving the fall in neutral interest rates could be reversed. If supply growth in Treasuries starts to outpace demand, that will mean lower prices and higher yields, which will put upward pressure on neutral interest rates, Mr Waller said.
On the same day, Goldman Sachs adjusted its forecast for the Fed's first rate cut, which is not expected to start until September, up from July.
So, how much impact will this speech have?
Waller warning
Federal Reserve Governor Waller said Friday local time that the decline in neutral interest rates over time may be due to a significant change in global demand for safe assets, but he warned that unsustainable fiscal spending could change that trend.
'in the short term, I don't see any reason for him to change his view of neutral interest rates, 'Mr. Waller said. However, this may change in the future, which requires close attention. Mr Waller said the US was on an unsustainable fiscal path, and if the supply of US Treasuries began to outpace demand, that would mean lower prices and higher yields, putting upward pressure on neutral interest rates.
Fed officials have made long-term neutral interest rates a central topic of policy discussion this year. Neutral interest rate is a theoretical concept that describes policy settings that neither stimulate growth nor restrain demand. It can not be observed in real time, and there is great uncertainty in the estimation range. Waller points out that an important fact about neutral interest rates is that it is a theoretical concept and there is no reliable and direct way to determine its value.
Waller focuses on 10-year Treasury yields as an alternative indicator of neutral interest rates because it represents the market's collective view of the direction of long-term interest rates. Waller listed several trends that could drive it down.KensingtonbingoLower inflation and economic volatility make it more attractive to hold longer-term Treasuries; liberalization of global capital markets has helped boost demand for safe, liquid assets such as Treasuries, driving down yields; increased dollar assets held by official foreign institutions such as central banks and sovereign wealth funds Domestic demand for Treasuries has increased as retirees need safer and more liquid assets, regulations require banks to hold more liquid securities, and central banks have increased their positions.
Waller said, "KensingtonbingoI don't think these factors can explain the potential increase in neutral interest rates recently, but it is conceivable that some of these factors may contribute to the rise in neutral interest rates in the future. "
Earlier this week, Waller said that while recent data suggest that progress may have been restored on inflation, he needs to see good inflation data for "a few more months" before starting to cut interest rates. If the data remain weak over the next three to five months, the Fed may consider cutting interest rates by the end of 2024. Mr. Waller said recent price data showed only modest progress in meeting the fed's 2% inflation target, and he rated the latest u.s. CPI report as C +.
Waller has been a Fed governor since December 2020 and is a voting member of the Federal Open Market Committee (FOMC). Waller's speech attracted a lot of market attention, not least because he is a Fed governor who has the right to vote on FOMC. Earlier this year, Nick Timiraos, known as the "New Federal Reserve News Agency," pointed out that Federal Reserve Governor Waller's accurate judgment of the direction of the US economy two years ago increased his influence, and if Trump is re-elected, Waller may become a strong candidate for the next Fed chairman.
Goldman Sachs adjusts its expectations again
A string of better-than-expected US economic data this week lowered the Fed's interest rate cut expectations again. On Friday, Goldman Sachs adjusted its forecast for the Fed's first drop window again. Goldman Sachs doesn't expect the Fed to cut interest rates until September, up from July. Goldman Sachs believes that because the US economy is still resilient, the case for loosening monetary policy is not valid for the time being. In addition to Goldman Sachs, Nomura earlier this week also pushed back expectations of the Fed's first cut from July to September, and expects the Fed to cut interest rates only twice this year.
Jan Hatzius, an analyst at Goldman Sachs, said in a report: "earlier this week, we pointed out that to push for the Fed to cut interest rates in July, we need not only better inflation data, but also significant signs of weakness in economic activity or job market data. But against the backdrop of stronger-than-expected manufacturing PMI data in May and a decline in first-time jobless claims, an interest rate cut in July is unlikely to happen. " The last time Goldman adjusted its forecast for the Fed's rate cut path for the year was last month, when it cut its forecast for the number of Fed rate cuts this year from three to two, and thought the two cuts would take place in July and November, respectively.
Although Goldman Sachs delayed its forecast for the first window, it still expects the Fed to cut interest rates twice by the end of 2024-an average of once every quarter or every other meeting. That means that if things go according to economists' forecasts, the Fed's second rate cut will take place in December.
U.S. Treasury Secretary Yellen said on Thursday that the "sharp rise" in the cost of living is "a problem for many people." Persistent inflation has undermined incumbent President Joe Biden's approval ratings ahead of the November election. Yellen acknowledged that despite strong wage growth in recent months, the prices of housing and daily necessities are still high for many voters.
The minutes of the monetary policy meeting from April 30 to May 1 released by the Federal Reserve on Wednesday showed that the prices of goods and services in the United States have risen significantly recently and there is a "lack of further progress" in achieving the Fed's long-term inflation target of 2%. Us inflation faces a number of upside risks, especially geopolitical factors that could cause prices to continue to rise, putting pressure on consumers, especially low-income groups. Fed officials believe that the current level of the federal funds rate is sufficient to curb US economic activity and reduce inflation, which is expected to fall back to 2% in the future, and the Fed may keep the current interest rate unchanged.
According to the minutes of the meeting, economic data showed that inflation was more lasting than previously expected, the economy was generally resilient, and policy expectations changed significantly accordingly. The policy interest rate path derived from futures prices means that there will be fewer than two 25 basis points interest rate cuts by the end of the year, and the modal path based on options prices is quite flat, indicating that a maximum of one interest rate cut will be in 2024.
Based on pricing in the swap market, the first Fed rate cut, which is currently fully priced in the market, will be in December. The possibility of two interest rate cuts throughout the year is less than 30%, which is significantly reduced from the probability of about 70% last week.
On Friday, U.S. stocks closed higher, with the Nasdaq up 1.5 percentkensingtonbingo.1%, setting a record closing high, and the S & P rose 0kensingtonbingo.7%, with the Dow rising 0.01%; most popular technology stocks rising, with Nvidia rising more than 2%, continuing to hit a record high.
Deutsche Bank strategists believe that even if the Federal Reserve does not cut interest rates this year, the S & P 500 index can continue to soar and hit another all-time high. Binky Chadha, the bank's chief U.S. equities and global strategist, said stocks can remain strong even in the face of a longer period of high interest rates as long as the economy and corporate earnings are growing.
Editor in charge: Yang Yucheng