TF Securities: The Federal Reserve did not convey the urgency of rate cuts

According to the information obtained from the Wise Finance APP, TF Securities released a research report stating that after this meeting, the current rate cut expectations may still be too optimistic, mainly based on two aspects. Firstly, based on Powell's description, the trend of economic data meeting expectations is considered a prerequisite for the rate cut in September; however, the current rate cut expectations may be overly focused on the weakness of the labor market and neglecting the possibility of inflation rebounding again. Secondly, although Powell mentioned during the press conference that some officials had different opinions at this meeting, this is not a reason for a rate cut in September. Uncertainty is a normal state for an economy, and policymakers need to learn to make decisions in uncertain environments. The bank believes that if the market is trying to build overly certain rate cut expectations on such uncertainty, it will only bring greater uncertainty in the end; and the rate cut itself adds to the existing uncertainty, making resistance even greater.

The main points of TF Securities are as follows:

Whether in statements or press conferences, Powell did not show a "clearly dovish" side, the most impressive part being Powell's continuous emphasis on making decisions based on overall data and striving to balance risks to achieve the "dual mandate".

The bank believes that this meeting is still "relatively hawkish" because the current rate cut expectations are mainly driven by concerns about rising unemployment rates, but the Fed believes that the labor market is just a "normalization process" and does not convey the urgency of a rate cut.

At the same time, the bank does not believe that Powell's clear statement of "considering a rate cut in September" is a dovish stance. On the one hand, Powell also mentioned various possibilities from "zero cut" to "several cuts"; on the other hand, Powell made efforts throughout to present a "neutral" stance and did not guarantee a rate cut in September.

Specifically, based on recent dynamics in U.S. inflation and the labor market, three adjustments were made in the statement.

First, the addition of jobs changed from "remained strong" to "moderated," and the unemployment rate changed from "remained low" to "moved up slightly but remained low." It is worth mentioning that the description of the unemployment rate is consistent with Powell's previous description in congressional hearings and is not new.

Second, when describing the level of inflation, "somewhat" was added to show the recent downward trend in inflation levels, and the previous description of "modest further progress" in inflation progress was changed to "some further progress" to indicate further changes.

Third, there was a clear emphasis on balancing the risks of the "dual mandate" rather than just focusing on "inflation risks."

The subsequent press conference revolved around "rate cuts in September and why there was no rate cut at this meeting," where both hawkish and dovish arguments could be found The hawks see: The Fed continues to emphasize the dual risks and decision-making based on overall data, without overly emphasizing the rise in unemployment rates, and repeatedly expressing that the economy is normalizing.

The doves are more concerned: The Fed explicitly stated that it will start cutting interest rates "earliest" in September under the condition of "data meeting expectations," and this meeting discussed the possibility of rate cuts with some officials.

After this meeting, the bank believes that the current expectations of rate cuts may still be too optimistic, mainly for two reasons.

First, according to Powell's description, the trend of economic data meeting expectations is a prerequisite for considering rate cuts in September; however, the current expectations of rate cuts may be too focused on the weakness in the labor market and overlook the possibility of inflation rebounding.

In a previous report, it was explicitly mentioned that oil, cars, and housing were the main reasons for the slowdown in inflation, but none of them reflected weakening demand. Subsequently, the June U.S. retail data (core month-on-month growth of 0.8%) and Q2 U.S. real GDP growth rate (quarter-on-quarter annualized growth of 2.8%, year-on-year growth of 3.1%) both exceeded expectations, indicating that the U.S. economy is still above its potential growth rate.

Private final consumption expenditure (PDFP) reflecting U.S. domestic demand maintained a quarter-on-quarter annualized growth rate of 2.6% in Q2, and actual wage growth has been positive or stable for 13 consecutive months, reflecting the resilience of demand. Another factor driving the rebound in inflation, oil prices, saw retail gasoline prices in July increase by over 1% compared to June, with broad gasoline demand remaining high.

Secondly, although Powell mentioned at the press conference that some officials had different opinions at this meeting, the bank believes this is not a reason for an immediate rate cut in September; comparing the press conference and statement of the June 2019 FOMC meeting reveals significant differences (June 2019 was the last meeting before the previous preventive rate cut).

In the June 2019 statement, the Fed explicitly expressed "concerns about economic growth uncertainty," and in the press conference, it was also clearly stated that "8 members supported rate cuts at that time." In contrast, at this meeting, there was no clear discussion of dissenting officials (regarding rate cuts at this meeting), nor was the number of dissenting officials clearly stated (this meeting even passed unanimously). Therefore, the internal resistance that the Fed's rate cut decision will face in 6 weeks must be considered.

Lastly, uncertainty is a norm for an economy, and policymakers must learn to make decisions in uncertain environments. The problem is that the current uncertainty comes not only from the economy but also from the pending U.S. presidential election.

The bank believes that if the market is trying to build overly certain expectations of rate cuts on such uncertainty, it will only bring greater uncertainty in the end; and rate cuts themselves add to the existing uncertainty, making resistance even greater.

Risk Warning: U.S. labor market slowdown exceeds expectations, U.S. inflation falls more than expected, unexpected events in the U.S. presidential election reoccur