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SignalPlus report: The Federal Reserve maintains interest rates despite calls from attendees to raise them before the end of the year.

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The FOMC is doing its best to maintain interest rates while attempting to achieve a good balance by increasing forward rate projections and hawkish rhetoric to achieve a "hawkish skip" in interest rate hikes.

Original Title: "SignalPlus: FOMC Special Edition"

Original Source: SignalPlus Chinese

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Yesterday, the FOMC did its best to maintain interest rates while achieving a good balance by raising forward rate forecasts and hawkish rhetoric to achieve "hawkish skipping of rate hikes" once again.

The key points in the statement are as follows:

1. The overnight interest rate remains unchanged at 5.25%.

2. Interest rate forecast for 2023 revised upward by 50 basis points to 5.6%.

3. The interest rate forecast for 2024 has been revised upward by 35 basis points to 4.6%. Of the 18 FOMC participants, 9 expect to raise interest rates twice before the end of the year.

4, 3 attendees are expected to raise interest rates in more than 2 of the next 4 meetings.

5. The statement added the argument of "possible appropriate additional policy tightening" as a sign of further policy tightening.

The core PCE inflation forecast has been raised to 3.9%; the GDP estimate has been raised from 0.4% to 1.0%.

As usual, the most exciting part of the meeting was the Q&A session that followed. Most of the questions focused on why the Federal Reserve decided to keep interest rates unchanged, even though many attendees called for two more rate hikes before the end of the year. Here are some interesting Q&A exchanges:

Regarding the summary of economic forecasts, the interest rate is expected to be raised positively.

"Inflation pressure remains high, and there is still a long way to go to return to 2%..."

Regarding whether the committee has reached a consensus:

Almost all FOMC members expect further tightening this year.

Regarding the increase of terminal interest rates to 5.6%:

Powell said that the level is "very consistent" with the market level of the federal funds rate before the regional bank crisis in March, so "we have returned to that level."

Regarding whether we are approaching the position where the Federal Reserve believes it should stop raising interest rates:

"I can almost say that the conditions we need to lower inflation (sufficiently restrictive interest rates) are in place...growth is significantly below trend...the job market is slowing down...and the supply chain situation is also improving."

Regarding why the Federal Reserve decided to "skip the rate hike" this month despite some members calling for two or more rate hikes.

Powell pointed out that this is a "speed issue...slowing down is appropriate, even if it's just a little bit, it's good for [decision-making]."

Finally, about their own [lack of] predictive ability:

"I won't overly rely on predictions, given their inherent uncertainty."

Although the discussion at the meeting has hawkish characteristics, the market reaction is much more moderate. After all, actions speak louder than words. Regardless of how strong the Fed's forecasts sound (they themselves admit that these forecasts are prone to errors), the Fed's decision to "skip rate hikes" (or pause) in the face of recent soft inflation data is hard to ignore. Therefore, with the bond market continuing to bet on economic slowdown and sustained soft inflation pressure under the hawkish interest rate background, the yield curve has flattened significantly or inverted again.

In the stock market, the party is still going on. There was a brief drop of about 0.8% in the pre-FOMC statement trading, but due to the minimal impact of the Fed on the market, the S&P 500 index ultimately closed flat. After the uncertainty of CPI and FOMC is eliminated, this Friday's major options expiration date (OpEx) may be one of the last major events before the start of summer vacation. The returns for June OpEx in history are not very even, but the reference value of historical experience may not be significant here, because the holders of call options are currently in a very in-the-money position, and institutional investors need to roll their delta forward (net buying).

In terms of cryptocurrency, BTC is teetering on the edge of $25,000 (-3.8%), while ETH has fallen to $1,650 (-5.8%) after the FOMC. In addition to regulatory FUD and concerns about the liquidation risk of CurveFinance protocol (-13%) founder, without new narratives, Bitcoin continues to closely track terminal rate pricing and gold spot prices. This relationship is expected to remain unchanged in the coming months unless there is a breakthrough in regulation. As long as terminal rate expectations remain high, cryptocurrency prices (and general alternative assets) will continue to face resistance.

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