Summary of Key Points
The June Federal Reserve interest rate meeting was the first chaired by new Chairman Kevin Walsh. The meeting decided to maintain the current interest rates unchanged, but after the announcement, U.S. stock prices fell, and market expectations for interest rate hikes this year increased. The key contradiction lies in the fact that although no hike was made, the message sent was actually one of “a higher likelihood of future hikes,” which led to a reversal in market sentiment.
Detailed Analysis
1. Why is the market more concerned about hikes when no hike occurred?
The “mystery” around this meeting does not lie in the fact that no hike was made, but rather in two key pieces of information released by the Federal Reserve:
- The change in the dot plot: This can be understood as a “map of interest rate forecasts by Fed officials.” Previously, it was thought that there might only be one hike this year, but now most officials believe there will be two or more. This signals to the market that they believe inflation has not been subdued and that further hikes are necessary.
- A more optimistic economic outlook: The Federal Reserve raised its forecast for U.S. economic growth this year (from 1.4% to 2.1%) while noting that the job market remains tight. This indicates that the economy is strong enough to withstand interest rate hikes.
With these two signals, the market realized that the current pause in hiking was not a permanent end, but rather a temporary stop before more increases are likely to follow.
2. Walsh’s debut: Where does the “hawkish” stance of the new chairman lie?
Walsh’s style is significantly different from that of his predecessor, Jerome Powell:
- Powell often left room for flexibility in his statements (e.g., saying “we will wait and see the data before making a decision”), while Walsh was much more direct. At the press conference, he explicitly stated that inflation was still far above the 2% target and that they would not stop hiking too soon.
- Walsh also emphasized the need to bring inflation down to the target level, suggesting a more aggressive approach to controlling inflation compared to Powell.
In short, the new chairman is more determined to combat inflation, which increases the likelihood of interest rate hikes.
3. Why did U.S. stock prices fall?
The logic behind the decline in stock prices is simple: interest rates and the stock market are like a seesaw. When markets expect future rate hikes, investors prefer to put their money in banks or buy bonds, as they offer higher returns with lower risk. This is especially true for technology stocks (such as Apple and Tesla), whose valuations rely on future earnings. When interest rates rise, the value of future cash decreases, leading to lower stock prices.
After this meeting, market expectations for year-end interest rates increased by 0.25%, causing all three major U.S. stock indexes to fall (the Dow Jones fell 0.68%, and the Nasdaq fell 1.16%).
4. What impact does this have on individuals?
The impact is indirect, but you should be aware of the following:
- Higher borrowing costs: If the Federal Reserve continues to raise interest rates, the interest rates on U.S. dollar loans from domestic banks may increase (e.g., for studying abroad or online shopping). Domestic mortgage rates could also be affected indirectly due to the strengthening dollar.
- Better returns on savings: Dollar deposits will offer higher interest rates (for example, some domestic banks offer over 3% on fixed-term deposits in dollars). If you have dollars, consider putting them in a fixed deposit.
- Be cautious with investments: If U.S. stock prices continue to fall, investors in U.S. stock funds (such as Nasdaq ETFs) may suffer losses. Additionally, a stronger dollar could cause the prices of commodities like gold and oil to decline, affecting related funds.
- Online shopping/studying abroad: A stronger dollar makes imported goods (such as cosmetics and bags) cheaper, but it will increase the cost of studying abroad or traveling.
5. What’s next? What are the chances of a hike in July?
The market is now focusing on the July interest rate meeting:
- Data will be crucial: The June CPI (inflation data) and non-farm employment data are key indicators. If inflation remains above 3% (currently around 4%) and the number of jobs continues to increase, the likelihood of a hike in July exceeds 70%. If the data is unfavorable (e.g., inflation declines rapidly or job growth slows), a hike may be postponed.
- Walsh’s stance: If he continues to emphasize that inflation has not been brought under control in his public statements, a hike is almost certain.
In summary, whether there will be a hike in July depends entirely on the economic data. Strong data will support an hike, while weak data will lead to a pause.
Conclusion
The essence of this meeting was for the Federal Reserve to use a temporary pause in hiking as a way to buy time and to signal to the market that interest rate hikes are still possible in the future. For individuals, there is no need for excessive anxiety, but it’s important to monitor changes in dollar interest rates and exchange rates and adjust your financial and spending plans accordingly.