This summer, the Federal Reserve will lay the groundwork for interest rate cuts

The June meeting of the Federal Reserve proceeded as scheduled, with the dot plot indicating a hawkish stance. However, the soft May CPI data and the Fed's acknowledgment of inflation progress have also cheered the market. The market has already bet that the Fed may cut interest rates at least twice this year.

The timing of the Fed's rate cuts is currently unclear, but besides direct rate cuts, the Fed has many indirect ways to influence the market. Even if the FOMC meetings in July and September remain unchanged, the Fed can lay the groundwork for rate cuts by guiding market expectations.

One direct way the Fed influences short-term interest rates is by adjusting the target range for the federal funds rate, which is the rate at which U.S. commercial banks lend to each other overnight. This target range is currently between 5.25% and 5.5%, the highest range in over 20 years. The dot plot released in June showed that most Fed officials expect only one rate cut this year, lower than the three cuts projected in March.

In addition to the federal funds rate, U.S. Treasury yields and long-term loan rates are also affected by the Fed's policy path. Even without direct rate cuts, the Fed can influence other critical rates that are vital to market operations by conveying its intentions.

Taking the 10-year benchmark U.S. Treasury yield as an example, weak economic data in recent weeks has pushed the yield down from 4.7% at the end of April to around 4.25% before the Fed's decision announcement on Wednesday. The yield briefly rebounded after the dot plot was released; however, it fell back to around 4.27% on Thursday morning following weak U.S. PPI data.

Changes in the 10-year Treasury yield will further transmit to long-term loan rates, such as mortgage loans or large project loans provided to real estate developers, subsequently affecting the U.S. real economy.

The Fed's decision statement, Chairman Powell's remarks at the rate decision press conference, speeches by Fed officials at various events... all these will impact the movement of the 10-year Treasury price and long-term rates. The market often captures signals from the Fed, determining the future policy path and preparing in advance for monetary policy.

Some media comments suggest that at least since Ben Bernanke's tenure as Fed Chairman (2006-2014), the Fed's policy changes have become a "formality" because well before the policy changes are announced, the Fed has already conveyed its intentions through various channels, laying the groundwork for policy changes. This time may not be any different