The Federal Reserve, which is at a crossroads, has been forced into a passive position by the market.

Federal Reserve Chairman Powell will attend a hearing in the U.S. Congress on July 10-11 local time, 21 days before the July interest rate meeting.

As there are major differences within the Fed and between the Fed and the market regarding the July interest rate cut, this hearing has become particularly critical.

what happened?

Pull the timeline back to early June.

On June 4, the Federal Reserve released its first interest rate cut signal at the Fed Listens conference in Chicago.

Although both the Chairman and Vice Chairman of the Federal Reserve on that day stated that the Federal Reserve would take appropriate measures to maintain continued economic expansion, implying that the Federal Reserve was open to cutting interest rates, it is worth noting that compared with the period of the Federal Reserve's "insurance" interest rate cuts in 1999, Powell said that he

At that time, the U.S. economy was in the eighth year of its expansion cycle, with core inflation at 1.4% and unemployment at 4.1%, which was not much different from now. But one big difference between then and now is that the federal funds rate at that time was 5.2%.

Since then, standard expectations for the long-term neutral rate have fallen by 2 to 3 percentage points or more.

In other words, the current low level of federal interest rates is an important reason that hinders the Federal Reserve from cutting interest rates.

Powell emphasized that U.S. core inflation has been slightly below 2% in the past 12 months. If this "low surprise" persists, it will bring the U.S. federal benchmark interest rate closer to the effective lower bound (ELB).

In other words, inflation data will play an extremely critical role in whether the Fed decides to cut interest rates in a timely manner.

On June 19, the June decision statement deleted the "patience" argument, showing that the Federal Reserve began to "build momentum" for interest rate cuts.

The dot plot released at the meeting showed that 8 of the 17 Fed officials believed that interest rates should be cut by 50 basis points this year.

Eight of the 17 officials expect at least one interest rate cut this year (by 25 basis points each time), and seven of them think there will be two interest rate cuts; another eight believe that there will be no change during the year, and only one supports an interest rate increase this year.

Powell acknowledged that this was the first time the dot plot had signaled a rate cut, and many Fed officials believed there were better reasons to take more easing measures and believed that a rate cut was reasonable.

At the end of June, Powell attended an event at the Council on Foreign Relations in New York. Although Powell introduced the reasons why the Federal Reserve was considering cutting interest rates, he still insisted that inflation will rise back to 2%, although the pace will be slower than previously expected.

Powell also tried to reiterate a "wait and see" stance, "The question that my colleagues and I are working hard to analyze is whether these uncertainties will continue to affect the outlook, requiring additional policy adjustments. We will pay close attention to the information we receive about the economic outlook."

"We will take appropriate actions to maintain the expansion... Monetary policy should not overreact to short-term fluctuations in market sentiment." Powell's move tried to cool down expectations for a rate cut in July. After the meeting, CME Group Fed Watch expected 7.

The probability of a monthly interest rate cut of 50 basis points has dropped significantly, but the probability of a rate cut is still 100%.

In early July, U.S. non-farm payroll data for June was released, showing an increase of 224,000 jobs, significantly exceeding market expectations of 160,000 and the highest number in the past five months.

Non-farm payrolls is one of the data that the Fed pays most attention to, and the eye-catching non-farm payrolls data further weakens the Fed's motivation to cut interest rates.

CME Group's Fed Watch tool shows that as of press time, the market's expectation for the probability of the Fed announcing an interest rate cut this month is still 100%, but the expectation of a 50 basis point cut has dropped to 4.9%, and the expectation of a 25 basis point cut has risen to 95.1

%.

So in just one month, a scene like this emerged: The Federal Reserve has not yet given a clear signal on the timing of an interest rate cut, but the market is very certain that it will cut interest rates in July.

The bet between the market and the Federal Reserve By sorting out the Fed's dynamics in June, we can see the logic and basis for the Fed's recent decision-making: First, the market and the Fed have different understandings of the current non-agricultural and economic slowdown trends and extent.

In his speech in late June, Powell emphasized that the Fed pays more attention to trends than fluctuations.

The Fed believes that monetary policy should not be overly reactive to any individual data, event or short-term sentiment swing.

Second, the Federal Reserve is currently worried that there is "insufficient" interest rate policy space under lower nominal interest rates and cannot use it rashly.

However, the market does not fully understand this.

Powell emphasized that "when central bank interest rates are close to the zero boundary, policy responses when a real potential recession occurs will be more effective."

The Fed's current interest rate space of 2.5% is lower than the interest rate level of more than 5% in 2008, and also lower than the "insurance rate cut" level in 1999.