Federal Reserve Committee Debates Suspension of Interest Rate Hikes: First Signs Emerge

Based on the content of the above article, we can come up with the following suggestions to help whites make leveraged trading decisions:

1. There is a policy divergence within the Federal Reserve, which means that the trend of the dollar may be affected. If the Fed continues to raise interest rates, the dollar may strengthen, and vice versa, it may weaken. Therefore, whites can choose the appropriate currency pair for leveraged trading, such as USD/JPY, EUR/USD, etc., according to their expectations.

2. The US CPI data for March to be released tonight is also an important risk event, which will reflect the level of inflation and the state of the US economy. If the CPI data is higher than expected, then the possibility of a Fed rate hike will increase and the dollar may rise, and vice versa, it may fall. Therefore, whites can do a good job of risk control before the data is released and set stop-loss and take-profit points to avoid being hurt by market volatility.

3. The impact of the banking crisis on the U.S. economy is uncertain, but it is likely to lead to a decline in market confidence and lower risk appetite. This could have a negative impact on stock and commodity markets and a positive impact on safe-haven assets such as gold and bonds. Therefore, whites can choose the right leverage ratio and trading instruments, such as gold/USD, crude oil/USD, etc., according to their risk tolerance.

4. The Fed may raise interest rates at its next meeting, which is positive for the US dollar and negative for gold and other non-US currencies. Therefore, we can consider going long the USD index and short gold or other non-US currencies.

5. U.S. inflation data may fall back, which is positive for U.S. bonds and negative for stock market. Therefore, we can consider going long on U.S. bonds and short on stock indices or stocks.

6. The divergence between the hawks and doves of the Fed has increased, which is bad for market volatility. Therefore, we may consider reducing leverage, reducing positions and avoiding excessive risk-taking.

The original article is as follows:

Caixin News Agency, April 12 (Editor Xiaoxiang) Just as the industry is eagerly awaiting the upcoming release of the U.S. March CPI data tonight to point the way for the May rate meeting, the Fed’s hawk and dove officials overnight, surprisingly staged a dramatic early showdown ……

The focus of their dispute is precisely the topic that market participants are most concerned about: whether to continue to raise interest rates or not?

The side in support of the rate hike is the Fed “three hands”, with permanent voting rights of the New York Fed President Williams. The side that believes that interest rate hikes should be held off is the Chicago Fed President Goolsbee, who only took office this year but also holds the right to vote on the FOMC this year. The latter has also become the first official to suggest that Fed policymakers may need to postpone further rate hikes in the current rate hike cycle ……

In last month’s U.S. banking crisis has just ignited people’s fears of recession, the Fed’s internal policy disagreement at this sensitive point in time, suddenly “surfacing”, has to be a very interesting thing to play.

This may also signal that the Fed benchmark interest rate is getting closer to the expected terminal rate of Fed officials, the past year or so, the Fed’s hawkish voice alone in the situation, may have come to an end!

Fed hawk-dove battle?

New York Fed President Williams said in a media interview on Tuesday that Fed policymakers still have more work to do in reducing inflation and stressed that they will not change that course despite the uncertainty caused by the banking sector turmoil.

At last month’s meeting, the Fed raised its target range for the federal funds rate by 25 basis points to between 4.75% and 5%, which is the ninth increase in the Fed’s current tightening cycle. the interest rate dot plot released at the March meeting also showed that policymakers expect rates to reach 5.1% by the end of the year, which means they will raise rates again this year and then pause.

In response, Williams said the latest Fed policymakers’ outlook in March was to raise rates once more this year and then leave them unchanged, which is a “reasonable starting point,” although the final path will depend on the performance of the next economic data.

He noted that “we need to do what we should do to make sure that inflation is kept down. While inflation is declining, it is still well above the Fed’s 2 percent target, and inflation in some core services, excluding real estate, has remained virtually unchanged recently.”

Addressing the recent banking crisis, Williams argued that the impact of the event on the U.S. economy is uncertain. He reiterated that policymakers will be watching economic data closely for any signs that portend a negative shock, but right now no such impact has been seen and the banking system remains sound.

Compared to Williams’ overall preference for continued rate hikes, Goolsbee, another Fed official who made an appearance overnight, was clearly much more dovish. Goolsbee said Tuesday that the Fed should be cautious about raising interest rates in the face of recent banking sector pressures, and he became the first senior Fed official to express more clearly that the next rate meeting may require a pause in rate hikes.

( Goolsbee in the current Fed belongs to the dovish camp )

Speaking at an event hosted by the Economic Club of Chicago, Goolsbee said, “Given the great uncertainty about the direction of these financial headwinds, I think we need to remain cautious. We should gather further data and be cautious about overly aggressive rate hikes until we see how much the headwinds help us in terms of lowering inflation.”

Goolsbee also said that inflation and labor market data at the end of 2022 and early this year were “surprisingly strong,” but the ripple effect of the Silicon Valley bank failures in March and the resulting financial market stress could help the Fed cool the economy. We have been tightening the financial environment to keep inflation down, so if the response to recent banking problems leads to financial tightening, monetary policy (tightening intensity) will have to be reduced.

Unusual Timing

As most industry participants are still waiting for tonight’s March CPI data to give more clues on the direction of policy, the overall response from financial markets has not been great, despite the rather obvious divergence in Fed officials’ speeches overnight.

However, this may also be a sign that once the performance of the next economic data has any wind, may trigger a long-stored long and short people’s stress reaction.

Chicagoland’s Fed Watch tool shows that the market expects the probability of a 25 basis point rate hike at the Fed’s next meeting fell back to below 70% last night.

In the bond market, the maturity of the U.S. bond yields overnight overall mixed. Among them, the 2-year U.S. bond yield rose 0.9 basis points to 4.033%, the 5-year U.S. bond yield rose 0.9 basis points to 3.535%, the 10-year U.S. bond yield rose 0.9 basis points to 3.432%, the 30-year U.S. bond yield fell 0.8 basis points to 3.622%.

This week’s data release is important because it will be one of the last sets of data before the Fed meeting on May 3,” said William Northey, an analyst at Hopewell Wealth Management. And, as the Fed assesses its fight against inflation and the appropriate pace of monetary policy, market participants are already leaning toward the Fed to raise rates further at its next meeting.”

He added, “This data set will certainly provide new context for the Fed’s assessment of where they stand in this battle.”

Current median estimates from an industry media survey of economists suggest that the year-over-year increase in the U.S. consumer price index is expected to slow to 5.1 percent in March from 6 percent. The core CPI, which excludes energy and food prices, is expected to rise from 5.5% to 5.6% year-over-year.

It is worth noting that historically, the Fed’s tightening cycles have tended to raise rates until they are above the CPI. From this point of view, if the U.S. CPI in March can really fall sharply as expected, it will come right to the end of the Fed officials’ estimates of interest rates, which indicates that the Fed’s current round of tightening road has indeed come to a “crossroads”.

This is a sign that the high inflation situation in the United States has not been fundamentally curbed, which is perhaps why at this juncture, the Fed’s hawks and doves are diverging more and more obviously. ……


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