Summary of Key Points
This Fed interest rate meeting is more suspenseful than usual: while the market generally expected no changes to rates in July, the breakdown of the US-Iran ceasefire and subsequent surge in energy prices have reignited expectations for a rate hike. Current interest rate futures indicate that the probability of a hike is about one-third, making the outcome seem more like a test of Federal Reserve Chairman Jerome Powell's personal strategy. The focus is on four main issues: whether rates will be raised, how many officials voted against it, whether the policy statement will change, and how Powell will explain the decision.
Detailed Analysis
1. Will Rates Be Raised Tonight?
The most likely outcome is that nothing will change (the current range of 3.5%-3.75%). There are three reasons for this:
- Inflation Data Provides Confidence: Inflation cooled down in June, falling short of the red line that some officials had mentioned as a necessity for a rate hike.
- Officials Have Preceded with Signals: Senior officials who previously guided market expectations have not hinted at a rate hike recently.
- Powell's Own Signals: During his five-hour testimony to Congress two weeks ago, he did not mention any plans for action.
If rates are indeed raised, it would be a significant turnaround:
- It would contradict the views of officials who advocated maintaining the status quo, and their words might lose credibility in the future.
- It could also cause political issues: The White House has been saying that interest rates are too high and inflation is under control. Since Powell was nominated by Trump, raising rates would go against the administration's stance and challenge the rumor that Powell follows Trump's orders.
2. How Many Opposing Votes Will There Be?
Even if the Fed decides not to raise rates, the number of votes against it is crucial as it directly affects the stock and bond markets.
Several “hawkish” officials (those advocating for a hike) have been identified:
- Governor Charles E. Waler and Christopher C. Cooke: They may consider raising rates if inflation does not continue to decline.
- Governors Lael Brainard (Dallas Fed) and Loretta J. Harker (Cleveland Fed), who have voting rights this year, have explicitly stated that a rate hike is needed.
If rates are not raised, there could be 2-4 opposing votes (with Brainard and Harker likely voting against). More opposing votes could lead to a decline in the stock and bond markets, as investors might think, “If even some officials opposed the no-hike decision this time, the likelihood of a hike next time is greater.”
3. Will the Policy Statement Change?
It is likely that there will be minor adjustments, but the details need close attention.
During Powell's last meeting, he shortened the policy statement significantly (to just 130 words), removing any references to guiding future policy directions and focusing only on reducing inflation to 2%. This time, the statement is unlikely to change much:
- It may still mention “steady economic growth” and “stable unemployment rates,” but inflation will likely be mentioned as remaining high.
- New elements (such as productivity growth or capital expenditure) are not expected to be added.
However, since this is Powell's second meeting as chairman, the format of the statement is still being established. Even minor changes in wording (e.g., changing “high inflation” to “inflation has eased”) could be interpreted by the market as a shift in policy.
4. What Will Powell Say?
Powell’s remarks will be even more important than the decision itself:
- If rates are not raised: The market will ask, “You said you wanted to control inflation—why didn’t you act this time? What conditions must be met for a hike?” (Considering the current rise in energy prices and tensions between the US and Iran.)
- If rates are raised: The reasons given will determine the market's reaction:
- If the rationale is “to control inflation in the long term,” it might signal multiple future rate hikes, but long-term bond yields could decrease (as the market expects the Fed to be serious about lowering inflation).
- If the rationale is merely to address short-term energy price increases, the signal would be weaker, leading to confusion: “Inflation is declining—why raise rates now? Are there other reasons?”
In short, Powell’s words will directly determine the direction of the market, making them more critical than whether rates are raised or not.
Conclusion
The core of this meeting is the uncertainty. The previously expected no-hike outcome has been overturned, and everything now depends on Powell’s decision. Regardless of the result, the number of opposing votes, the details of the statement, and Powell’s explanation will be key for understanding market trends. These factors directly affect the stock and bond markets, as well as investment products such as US stocks and dollar-denominated assets. The outcome of tonight’s meeting could significantly change economic expectations for the coming months.