Federal Reserve Chairman Powell will attend the hearing in the US Congress in July10-1local time, 2 1 day before the interest rate meeting in July. This hearing is particularly crucial because there are great differences within the Fed and between the Fed and the market on the interest rate cut in July.

What happened?

Pull the timeline back to the beginning of June.

On June 4th, the Federal Reserve released the signal of interest rate cut for the first time at the Federal Reserve hearing. Although both the chairman and vice-chairman of the Federal Reserve suggested that the Fed take appropriate measures to maintain sustained economic expansion, suggesting that the Fed was open to interest rate cuts, it is worth noting that Powell said that the US economy was in the eighth year of its expansion cycle, with core inflation of 1.4% and unemployment rate of 4. 1%, which was different from the present situation. Since then, the standard expectation of long-term neutral interest rate has dropped by 2 to 3 percentage points or more. In other words, the current low federal interest rate is an important reason that hinders the Fed from cutting interest rates.

Powell stressed that in the past 12 months, the core inflation rate in the United States was slightly lower than 2%. If this "low accident" continues, the US federal benchmark interest rate will be closer to the lower bound of effective interest rate (ELB). In other words, inflation data will play a crucial role in whether the Fed decides to cut interest rates in time.

/kloc-The decision statement of June 0/9 deleted the argument of "patience", indicating that the Fed began to "build momentum" for interest rate cuts. The bitmap released at this meeting shows that among the 17 Fed officials, 8 believe that interest rates should be cut by 50 basis points this year. /kloc-8 out of 0/7 officials expect to cut interest rates at least once this year (25 basis points each time), and 7 of them think they will cut interest rates twice; Another eight people think that they should stay put during the year, and only one person supports raising interest rates this year. Powell admitted that this was the first time that Bitmap sent a signal to cut interest rates. Many Fed officials believe that there are better reasons to take more easing measures and it is reasonable to cut interest rates.

At the end of June, Powell attended an activity of the Council on Foreign Relations in new york. Although Powell introduced the reasons why the Federal Reserve is considering cutting interest rates, he still insisted that inflation would rise to 2%, although this rate would be slower than previously expected. Powell also tried to reiterate his "wait and see" position. "What my colleagues and I are trying to analyze is whether these uncertainties will continue to affect the prospects and thus require additional policy adjustments. We will pay close attention to the impact of the information received on the economic prospects and take appropriate actions to maintain expansion. ..... Monetary policy should not overreact to short-term fluctuations in market sentiment. "

Powell's move is an attempt to cool down the expectation of interest rate cuts in July. After the meeting, the Fed of Chicago Board of Trade observed that the probability of cutting interest rates by 50 basis points in July dropped sharply, but the probability of cutting interest rates was still 100%.

In early July and June, American non-agricultural data was released, and the number of employed people increased by 224,000, which greatly exceeded the market expectation of 6,543.8+0.6 million, the highest in the past five months. Non-agricultural data is one of the most concerned data of the Fed, and bright non-agricultural data further weakens the motivation of the Fed to cut interest rates.

According to the Fed observation tool of Shang Zhi Research Institute, as of press time, the market's expectation of the Fed's interest rate cut this month is still 100%, but the expectation of a 50 basis point rate cut is lowered to 4.9%, and the expectation of a 25 basis point rate cut is raised to 95. 1%.

So in just one month's time, there was such a scene: the Fed has not given a clear signal about the time to cut interest rates, but the market is very sure that it will cut interest rates in July.

Bet between the market and the Fed.

Combing the dynamics of the Fed in June, we can see the recent decision-making logic and basis of the Fed:

First of all, the market and the Federal Reserve have different views on the current trend and degree of non-agricultural and economic slowdown. In his speech at the end of June, Powell emphasized that the Fed pays more attention to trends than fluctuations. The Fed believes that monetary policy should not overreact to any individual data, events or short-term mood swings.

Second, at present, the Fed is worried that under the low nominal interest rate, the interest rate policy space is "insufficient" and cannot be used rashly. However, the market does not fully understand this. Powell stressed that "when the central bank's interest rate is close to zero, when there is a real potential economic recession, it will be more effective to make a policy response." At present, the interest rate space of the Federal Reserve is 2.5%, which is lower than the interest rate level of more than 5% in 2008, and also lower than the "insurance interest rate cut" level from 65438 to 0999.

Then the next question is, should we cut interest rates in July? What will happen if the interest rate is not cut in July?

In view of the huge differences within the Fed and between the Fed and the market, this difference may also be brewing more than expected. If the Fed does not cut interest rates in July, it will have a greater impact on economic judgment, policy interpretation and market trends.

The market expectation reflected from the capital interest rate futures once gave the probability of interest rate reduction in July as 100%. Is this data reliable?

Guotai Junan macro team pointed out that at the turning point of historical policy changes, the market is more radical than the Federal Reserve in most cases; The market's expectation of the Fed's interest rate policy is often "wrong" and sometimes even long-term deviation. For example, in 2009 -20 16, the market expects interest rates to rise, but the actual situation is that the Fed continues to hold its ground; For another example, in 2008 and 2009, the Federal Reserve cut interest rates rapidly, and the market made a "misjudgment" in raising interest rates.

What will happen if the interest rate is not cut in July?

Looking back on the past 30 years, 30 days before the interest rate meeting, the market expected the Fed to cut interest rates, but in the end, the Fed did not cut interest rates only twice, namely February 1990 and February 1992. Both were adjustments by US stocks, and oil prices also showed a trend of adjustment and shock.

The macro team of China CITIC Construction Investment Co., Ltd. said that since the market's expectation of interest rate cut in July rose to 100%, the Fed has actually lost a good time window for expected management. At present, the market's expectation of interest rate cut in July is still 100%. If the interest rate is not cut in July, it will bring new uncertainty to the market, which the Fed may not want to see. Therefore, although the data does not show that a recession is coming, the Fed may have fallen into an embarrassing situation where it has to be sent.

The commentary of the Financial Times also believes that the Fed really seems to have no way out. Considering that the market firmly believes that a looser policy is coming, if the US central bank stays put, the market may suffer a serious impact (similar to the turmoil that occurred in June 5438+February last year).

However, adjusting market expectations is also an important part of the Fed chairman's work, so Bauer will also regard this congressional testimony as a unique opportunity to clarify his position.