The Federal Reserve's monetary policy will undoubtedly have a huge impact on financial markets. But in recent times, especially as the interest rate meeting on September 20-21 approaches, the market seems to be paying too much attention to the Federal Reserve. Any speech by Fed officials will be repeatedly speculated, which will trigger a reaction in asset prices.
The most obvious ones are Fed Chairman Yellen’s speech at the Jackson Hole conference at the end of August, two Fed officials’ speeches last Friday, and Fed Governor Lael Brainard’s speech on Monday. On August 26, Yellen said at the annual meeting of global central banks in Jackson Hole, Kansas, that the possibility of raising the federal funds rate has increased in recent months. But she also left a way out for not raising interest rates, saying that raising interest rates has always depended on the extent to which future economic data confirms the Fed's expectations. The economic outlook is full of uncertainty, so monetary policy is not on a preset track.
The dollar weakened slightly after Yellen's speech, as the market had expected Yellen's speech to be tougher. Nonetheless, Yellen's speech generally seemed to open the door to a short-term interest rate hike, and as a result, the Dow Jones fell 0.3% and the S&P 500 fell 0.2% at the end of the day. The U.S. dollar strengthened against major currencies. U.S. Treasuries fell, with yields higher.
On Friday, the speeches of two "hawkish" officials from the Federal Reserve strengthened market expectations for the Federal Reserve to raise interest rates in the short term. Fed Governor Tarullo said he could not rule out raising interest rates this year, but he wanted to see more evidence of rising inflation first. Rosengren, President of the Federal Reserve Bank of Boston, said that the Fed has certain reasons to advance the process of gradually raising interest rates.
Affected by the above statement, the U.S. stock market suffered its worst decline since June last Friday. The Dow Jones Index fell 2.13%, the S&P 500 Index fell 2.45%, and the US stock market value of US$500 billion evaporated instantly.
But just one trading day later, the speech of "dovish" Fed Governor Brainard caused the market to fluctuate in the opposite direction. Fed Governor Lael Brainard said in a speech on the U.S. economy in Chicago on Monday that the Fed should remain cautious and should not raise interest rates too quickly. The remarks helped U.S. stocks rebound from last Friday's decline, with the Dow Jones index rising 1.2% and the S&P 500 index rising 1.4%, the largest gain since July 8. After Brainard's speech, data from the Chicago Mercantile Exchange's federal funds rate futures showed that traders' probability of the Fed raising interest rates in September dropped to 15% from 24% last Friday.
Market debate over the Fed's interest rate hikes is also intensifying. According to Bloomberg, JPMorgan Chase CEO Jamie Dimon said on Monday that the Federal Reserve should raise interest rates sooner rather than later to protect its credibility. But Ray Dalio, founder and chairman of Bridgewater Associates, said on Tuesday that he disagreed with Dimon's view that it was time for the Federal Reserve to raise interest rates, saying that approach was risky. Dalio believes that the current economic risks are clearly tilted to the downside.
Dario has been warning for some time that the U.S. economy is at the end of a long-term debt cycle, which is characterized by insufficient spending despite interest rates approaching zero or even negative values. He said in a March interview that consumers would have to be encouraged to spend in the future, possibly even by sending cash directly to them.
For all the current speculation and debate about the Federal Reserve, Mohamed El-Erian, chief economic adviser to Allianz Insurance, may be hitting the nail on the head. He said on Twitter on Tuesday that it was regrettable that the market was so obsessed with the timing of the Fed's next 25 basis point interest rate hike, and that the timing of the rate hike was unlikely to change the outlook for a shallow rate hike cycle and low terminal interest rates. He even told CNBC that the Fed should simply raise interest rates.
