[analysis] Fed rate cut in September is certain? Not exactly!

SMM6, May 5: yesterday, the chairman of the Federal Reserve delivered a speech that was innocuous in its entirety. Powell was noncommittal about the interest rate cut that the market was concerned about. As a result, people can only pick words word for word, hoping to find Chairman Powell's attitude towards interest rate cuts, but as the number one figure in the Federal Reserve, Powell will obviously not let the market form obvious expectations of the Fed's monetary policy. So Powell chose to look around and talk about him, which is what senior Fed officials have always done.

Powell said in his speech that the Fed will take appropriate measures to maintain sustained economic expansion and is paying close attention to the impact of trade negotiations and other events on the outlook for the US economy, which has been interpreted by the market as suggesting that Powell may cut interest rates. Bank of America Merrill Lynch cut its forecast for US GDP growth to 1.2 per cent in the second half of 2019 from 1.8 per cent after Powell's speech, while Bank of America Merrill Lynch President Moynihan said it did not expect the Fed to cut interest rates this year. However, according to the latest news from CME Fed Watch, the probability that the Fed will maintain interest rates at 2.25% to 2.5% in June is 81.7%, and the probability of cutting interest rates by 25 basis points is 18.3%. The probability of keeping interest rates in that range in September is 9.7%, and the probabilities of cutting interest rates by 25 basis points and 50 basis points are 41.1% and 41.8%, respectively.

Who will predict accurately, of course, even if Powell supports a rate cut other Fed chairmen do not agree with it, in short, the outcome of monetary policy can only be known when the interest rate decision is announced. As far as I'm concerned, the New York Fed has already revealed that the Fed will start buying again in October and the contraction will end in September, and previous articles have mentioned that the plan has a similar interest rate cut, so I don't think the rate cut will come right away. As Powell said, the situation is very similar to that in 1999, when the federal funds rate was 5.2% and now it is only 2.5%, and the Fed doesn't have many bullets to hit. Interest rates have always been easy to come down, plus difficult to go. What is certain is that there is still a certain distance between the current interest rates and neutral interest rates. The return of interest rates to neutrality is the goal of the Fed's current round of interest rate increases, but unfortunately, there has been a sharp drop in inflation in the course of raising interest rates. This has the potential to make a return to neutral interest rates out of reach. At present, the US economy is mixed. On the one hand, the labor market is hot, the economy rose faster than expected in the first quarter, the stock market is fluctuating at a high level, and on the one hand, US bond interest rates are hanging upside down, and potential inflation is in the doldrums. The Fed does have the capital to wait and see, not to the point where it has to cut interest rates. Cut interest rates is not a good choice, cut interest rates can only show that there is something wrong with the economy, the so-called pull the whole body, the impact of interest rate cuts will be far greater than other policies, I believe the Fed will be very cautious.