The biggest surprise from the Fed’s September meeting on interest rates was a sharp increase in its forecast for the federal funds rate this year and next. The latest dot plot shows that the endpoint forecast for interest rate rises by the end of 2022 has increased significantly from 3.4% in June to 4.4%; the forecast for interest rates by the end of 2023 has been raised from 3.8% in June to 4.6%.
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As for the peak interest rate forecast, it also rose to 4.6% from 4.5% in June, and two-thirds of the committee members believed that the federal funds rate in 2023 will be above 4.5%. Reserve fund officials have emphasized that they will not cut interest rates next year. According to the dot plot, the interest rate level will only start to fall in 2024, falling to 3.9% by the end of the year, and then to 2.9% by the end of the year. end of 2025.
In terms of inflation expectations, the Fed expects PCE inflation to be 5.4% by the end of 2022 (5.2% in June), 2.8% in 2023 (2.6% in June), and 2.3% in 2024 (2.2% in June) , 2% in 2025 (first forecast), and the median long-term interest rate forecast is 2% (June forecast also 2%) Reserve officials’ inflation expectations are not as high as interest rate hikes .
In general, the rate and speed of interest rate hikes has increased, and the peak of the rate hike cycle has risen from the previous estimate of 4.4% to 4.6% Inflation expectations have also been raised higher than the previous estimate. A return to the Reserve Bank’s 2% target is even more difficult. the accompanying interest rate hike cycle begins in March this year and is predicted to last just over two years.
Precisely because of this ruling, Reserve Bank officials are less tolerant of inflation and hope to raise interest rates faster and more aggressively, in order to stop inflation quickly. Therefore, we see a total of 4 interest rate increases a month November. until March next year.1.5%, but Reserve Bureau officials tend to act more quickly The two remaining meetings this year are estimated to raise interest rates by 1.25%.Instead, in a quarter the first of next year, the pace will slow down and increase by only 0.25%% This attitude has caused the market to see a sharp rise in the US dollar and a sharp drop in US stocks and bonds Response.
Focus on CPI and PCE
When the pace of rate rises slows down depends on how fast inflation falls and when a recession arrives. Xiaoyong mentioned earlier that the US CPI in the third quarter of last year was between 5.2 and 5.4% In the fourth quarter, the US CPI rose sharply to 6% and above. Therefore, the CPI in the third quarter of this year was affected . by the low base and the increase was higher. The biggest chance of a slowdown in CPI growth is the October CPI published in mid-November and the October PCE published in late November. The CPI in the fourth quarter may fall from the current 8% to 6%; the core CPI may fall from 6% to 4%.
Is rising interest rates a foregone conclusion? Market-favoured 2-year and 10-year treasury bond yields have remained sharply inverted since the September meeting, and have continued for more than two months. it is very important not to reverse, from 0.2% before the interest rate meeting to 0.62% on Tuesday. As for another indicator that the Reserve Bank places importance on, the spread between 3-month Treasury bonds and 6-quarter futures has never reversed. Although there are no immediate concerns, rate rises continue to weigh on growth, with the two large interest rate differentials likely to reverse in the fourth quarter.
The Federal Reserve is holding a meeting on November 2 and is expected to raise interest rates by 0.75% After the mid-term elections in the US on the 6th, after the employment and inflation data are released in the mid- i-late. November, political results and economic data have become clear, and there is pressure to raise interest rates. With a big discount, Xiaoyong believes that it is time to buy stocks to see the bottom, but he will not choose the stocks of the United States, because the valuation is still high, the price earnings ratio of the S&P 500 index is 15.6 times, and instead, it will choose Hong Kong stocks.
Referring to historical data, the Hang Seng Index’s price-earnings ratio that falls below 10 times is a sign of closure, and the Hang Seng Index’s current price-earnings ratio is less than 9 times. Since the time for each time the bear turns to the bull and smashes the bottom is very different, Xiaoyong tends to attack in November. If there is a divergence signal at the previous time, only with a small bet the he will buy. At the moment, the main strategies are still bonds (mainly high yield bonds with a period of five years) and increasing holdings of cash, as the returns can be higher than those found in deposits stable cash, and the money in and out is more flexible. .
Yahoo Money Talk guest host, investment expert
This column is published every Thursday