The Federal Reserve held its FOMC meeting on September 18, announcing a 50-basis point cut to the federal funds rate, lowering it to a range of 4.75% to 5%. In its post-meeting statement, the Fed noted that the labor market had shifted from moderate growth to a slowdown, and its confidence in inflation returning to the target range had strengthened. Given the uncertainty surrounding the economic outlook and the balance of risks, the Fed decided to initiate a rate-cutting cycle, lowering rates by 50 basis points to support the U.S. job market.

In its Summary of Economic Projections (SEP), the Fed slightly revised down its 2024 economic growth forecast from 2.1% to 2.0%. It also raised the unemployment rate forecast from 4.0% to 4.4%, with unemployment expected to peak in 2025. Core inflation is projected to rise from 2.6% in June to 2.8%, with expectations for it to fall back to the target range by 2026.

The median of the Fed’s dot plot indicates that, assuming the economy develops as expected, interest rates will drop to 4.25% to 4.5% in 2024 (a total of 4 rate cuts) and to 3.25% to 3.5% in 2025 (another 4 rate cuts), with the long-term neutral rate projected to be between 2.75% and 3% (2 more cuts).

Overall, through this decision and economic forecast, the Fed aims to communicate to the market that while it acknowledges the weakening of the labor market, it remains committed to using appropriate rate cuts to support employment, while ensuring inflation stabilizes and economic growth continues.

Post-Meeting Press Conference Q&A Highlights

1. Labor Market

• Q: Historically, when the unemployment rate rises rapidly, it typically doesn’t stabilize quickly. However, the SEP data suggests that the unemployment rate will rise to 4.4% in 2024 and then stabilize. What is the mechanism behind this? What are the risks involved?
• A: Overall, the U.S. economy is growing steadily, inflation is gradually falling, and the labor market is returning to balance. The Fed’s goal is to maintain this status quo.
• Q: Over the past three months, the average monthly job gains were just over 100,000. Are you concerned about further deterioration in the labor market?
• A: This is mainly due to an increase in international migration, but the decline in job vacancies has also reduced overall job gains, which is the primary reason for the recent rise in the unemployment rate. Some FOMC members have considered the changes in the Beveridge Curve, noting that as job vacancies continue to fall, there may be a point where it directly converts to rising unemployment. We are likely approaching that point.

2. Inflation

• Q: With persistent housing inflation, is it still possible for overall inflation to return to 2%?
• A: Housing inflation has indeed been a drag on overall inflation. Although rental prices are falling slower than expected, as long as they remain low over the long term, it will eventually show in the overall inflation figures.

3. Interest Rate Adjustments

• Q: Recent labor market data has been significantly revised downward. Does this suggest that the Fed is behind in adjusting rates? Can we expect the Fed to maintain its current adjustment pace in the future?
• A: I do not believe the Fed is behind in adjusting rates. We have been taking timely, precautionary measures to respond to changes.
• Q: In the coming months, should we expect rate cuts of 25 bps or 50 bps?
• A: The SEP provides a reasonable reference, but the final rate adjustment will depend on economic performance. If the labor market weakens further, we may accelerate the rate cuts, and vice versa.

4. Balance Sheet Reduction

• Q: In 2019, the Fed halted its balance sheet reduction when it adjusted monetary policy. With this 50 bps rate cut, is there any indication that balance sheet reduction might stop as well?
• A: As of now, the Fed’s reserves remain sufficient. The balance sheet reduction has been primarily managed through the ON RRP (overnight reverse repurchase agreements). At this time, we are not considering halting the reduction. If rate cuts and balance sheet reduction are both seen as part of monetary policy normalization, then both can continue simultaneously for a period of time.

Comparison of the September and July FOMC Statements

The U.S. retail sales slightly increased in August, as reported by the U.S. Census Bureau on September 17. The U.S. Retail sales rose by 0.1% month-over-month in August, down from 1% in July, but better than market expectations of -0.2%. On a year-over-year basis, retail sales grew by 2.1%, lower than the previous month’s 2.7%.

The increase this month was primarily driven by online store sales, which saw a monthly growth of 1.4%. However, this was partially offset by a 0.1% decrease in automotive-related sales and a 1.2% decline in gas station sales.

Core retail sales (excluding automotive-related sales) rose by 0.1% on a monthly basis, while double-core retail sales (excluding automotive and gas station sales) increased by 0.2%. The control group retail sales, which exclude automobile sales, building materials, gasoline stations, and food services, rose by 0.3%.

In summary, while August retail sales showed some resilience in U.S. consumer spending, certain declines may have been driven by falling prices. Nevertheless, the market appeared to overlook the retail sales data, as FedWatch indicated that the probability of a 50-basis-point rate cut had risen to 65%, up from 50% the day before.

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Weekly Market Review:

Last week, a rebound in technology stocks propelled the S&P 500 to a 4% gain, positioning it to once again challenge historical highs. U.S. 2-year and 10-year Treasury yields continued to decline, reflecting expectations of Federal Reserve rate cuts, and the spread between the 10-year and 2-year Treasury yields widened to approximately 10 basis points. Meanwhile, the U.S. Dollar Index fluctuated around the 101 level.

Key Economic Data Review:

China CPI: China’s Consumer Price Index (CPI) increased by 0.6% year-over-year in July (previous: 0.5%). The rise in August was similarly influenced by extreme weather conditions, which drove food prices higher. Excluding food and energy, the core CPI stood at 0.3% (previous: 0.4%). Regarding the Producer Price Index (PPI), August’s PPI decreased by 1.8% year-over-year (previous: -0.8%), marking the 23rd consecutive month of decline. This indicates that deflationary pressures in China are persisting and showing signs of intensification.

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United States CPI: U.S. CPI increased by 2.5% year-over-year in August (previous 2.9%), with a monthly rise of 0.2% (same as the previous 0.2%). Breaking down the components, the year-over-year growth rate of housing services prices rebounded to 5.2% in August (previous: 5.1%). However, due to energy prices declining by 4% year-over-year (previous: +1.1%) pulled the overall CPI lower. Core CPI remained steady at 3.2% year-over-year (same as the previous 3.2%), with a monthly increase of 0.3% (previous 0.2%). Both CPI and core CPI annual growth rates were the lowest since February 2021.

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Eurozone Monetary Policy: In its September policy meeting, the European Central Bank (ECB) decided to cut the deposit facility rate by 25 basis points to 3.5% and announced the narrowing of the interest rate corridor, effective from September 18. The main refinancing rate and marginal lending rate were lowered by 60 basis points, reducing their respective spreads to 15 and 25 basis points relative to the deposit facility rate. On the economic outlook, the ECB raised its core inflation forecast for 2024 to 2026 to 2.9%, 2.3%, and 2.0% (June forecasts: 2.5%, 2.2%, and 1.9%), citing stronger-than-expected service sector inflation. However, due to restrictive financial conditions dampening private consumption and investment, the ECB lowered its economic growth projections for 2024 to 2026 to 0.8%, 1.3%, and 1.5% (June forecasts: 0.9%, 1.4%, and 1.6%).

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Key Data to Watch This Week:

U.S. Retail Sales (9/17): U.S. retail sales grew by 2.7% year-over-year in July (previous 2.0%), with a monthly increase of 1% (previous -0.2%). The July rise was largely driven by a 4% rebound in auto sales, reflecting recovery from the June slowdown caused by a cyberattack. The market expects August retail sales to normalize, with year-over-year growth slowing to 2.2% and a monthly increase of 0.2%.

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U.S. Monetary Policy (9/19): During the Jackson Hole symposium, Federal Reserve Chair Jerome Powell signaled that the time for policy adjustments had arrived, raising market expectations for a rate cut at the upcoming meeting. However, recent mixed U.S. economic data have created uncertainty regarding the size of the rate cut. According to Fed Watch data, the probabilities of a 25-basis-point and 50-basis-point cut are both at 50%.

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Japan Monetary Policy (9/20): After the Bank of Japan raised rates in July and indicated that it would refrain from further hikes in times of market instability, the market expects the BOJ to hold rates steady at this meeting, with the possibility of another rate hike in October or December.

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(Photo Crited: Pixabay )

The U.S. Producer Price Index (PPI) slightly increased in August, according to data released by the Bureau of Labor Statistics on September 12. The PPI rose by 0.2% month-over-month (previously 0%), exceeding market expectations of 0.1%. On a year-over-year basis, the PPI increased by 1.7% (previously 2.2%), falling short of the expected 1.8%, marking the lowest annual gain so far this year.

Breaking down the details, final demand goods prices remained flat month-over-month (previously up 0.6%), primarily due to a decline in energy prices, which dropped by 0.9% (previously up 1.8%). Excluding food and energy, prices rose by 0.2% for the month, posting the same increase as in the prior month.

Final demand services prices rose by 0.4% (previously down 0.3%), mainly driven by increases in other service categories, with guestroom rental prices contributing the most, surging by 4.8%. This mirrors the trend seen in the Consumer Price Index (CPI) data released a day earlier.

Overall, while the PPI demonstrated moderate growth in August, the Fed has shifted its focus on inflation towards the labor market. As a result, the inflation influence on future rate cuts has diminished. The market continues to anticipate a total of four 25-basis-point rate cuts throughout 2024, with expectations unchanged.

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The U.S. inflation continued to ease in August, as reported by the Bureau of Labor Statistics on September 11. The Consumer Price Index (CPI) increased by 2.5% year-on-year (previously 2.9%), with a monthly increase of 0.2% (unchanged from 0.2% in July). The core CPI, which excludes food and energy, remained steady with an annual increase of 3.2% (same as the previous 3.2%), and a monthly increase of 0.3% (up from 0.2%).

Breaking down the data, the decline in the annual CPI growth rate was largely driven by a reduction in energy prices, benefiting from last year’s high base effect. Energy prices fell 4% year-on-year (previously up 1.1%). However, core CPI, excluding food and energy, remained unchanged, primarily due to a rebound in housing services prices. The annual growth rate of housing services prices increased to 5.2% in August (up from 5.1%), with a monthly increase of 0.5% (up from 0.4%).

Housing prices have consistently been the largest impediment to the decline in core CPI. However, due to the recent slower pace of reduction, the market now anticipates an 85% probability of a 25-basis-point rate cut in September (up from 66% prior to the release of the CPI data). Moreover, the market expects a total of four rate cuts throughout 2024, with one in September, two in November, and one in December.

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