Will the market underestimate the determination of the Federal Reserve? On the eve of the July meeting, the Federal Reserve hawks: two more rate hikes are needed!

Will July be the last interest rate hike by the Federal Reserve? There are divergent views among the market and Federal Reserve officials.

On Thursday, July 13th, local time, Christopher Waller, a Federal Reserve Board member and "hawk," gave a speech at New York University, expressing support for two more interest rate hikes this year to bring inflation back to target levels.

Waller believes that the Federal Reserve should raise interest rates at the July meeting and should raise them again at a meeting in September or later. Waller explained:

The strong job market, combined with the resilience of the U.S. economy, provides room for further policy tightening. I believe it is appropriate to raise rates by 25 basis points for the second time sooner rather than later, but this decision is for the future.

Last month, I supported keeping rates unchanged to assess the economic outlook and address recent pressures in the banking industry, but now it seems that these troubles have passed.

Just before Waller's speech, the U.S. released CPI and PPI data. Following the slowdown in year-on-year growth of CPI to a two-year low in June, the year-on-year growth rate of PPI unexpectedly slowed from 1.1% in May to 0.1%, reaching a nearly three-year low.

Regarding the slowing growth of CPI and PPI data, Waller believes that it is not possible to determine a sustained slowdown in inflation based solely on one inflation data point:

U.S. inflation briefly slowed down in the summer of 2021 but then got worse, so I need to see that this trend can continue before I can conclude that inflation has slowed down.

The U.S. labor market is still very strong, and wage growth is higher than the level needed to bring the inflation rate back to 2%.

In addition to Waller, three other senior Federal Reserve officials have made consecutive statements this week indicating that interest rate hikes will continue. The market's expectation that the Federal Reserve's interest rate hike cycle is coming to an end and that interest rates will peak has been further strengthened after the data was released.

Multiple Senior Federal Reserve Officials "Release the Hawks"

Michael Barr, Vice Chairman of the Federal Reserve responsible for supervision, stated that over the past year, the Federal Reserve's monetary policy has made significant progress and is close to its targets, but there is still work to be done.

Mary Daly, President of the Federal Reserve Bank of San Francisco (non-FOMC voting member), believes that the current U.S. inflation rate is still too high and that two more interest rate hikes are needed:

It seems that two more rate hikes are needed to curb inflation. The Federal Reserve should base its policy decisions on economic data. The greater risk the Federal Reserve faces at present is insufficient rate hikes, rather than excessive rate hikes, although the gap between the two is rapidly narrowing.

Daly stated that signs of an economic slowdown are already emerging and that supply and demand are balancing better.

The President of the Federal Reserve Bank of Cleveland, Loretta Mester (non-FOMC voter), stated at an event at the University of California, San Diego that in order to ensure inflation returns to 2%, interest rates need to be further raised and maintained for a period of time.

Mester believes that the impact of the Federal Reserve's aggressive tightening policy since early 2022 has already been fully reflected:

This means that it is reasonable for us to continue tightening policy this year, and further tightening is needed to bring inflation back to the target level of 2%.

Market expects July to be the last rate hike

Currently, the market still expects the Federal Reserve to raise interest rates by 25 basis points in July, and after that, there will be no more rate hikes until the end of this year, with rate cuts expected to begin in January next year.

Investment management company Pendal Group believes that the Federal Reserve may cut interest rates faster and more aggressively than expected, and short-term US bonds will outperform the market.

According to Bloomberg's report on July 13th, Amy Xie Patrick, Head of Income Strategy at Pendal in Sydney, said that the yield on 2-year US bonds may fall to around 4% in the medium term. Given that US inflation in June fell more than expected, the Federal Reserve may start easing policy earlier.

Yesterday, after the release of US PPI data, the yield on 10-year US Treasury bonds fell nearly 10 basis points to 3.76% during the day, marking a four-day consecutive decline of more than 30 basis points from the four-month high reached last Friday.

The yield on 2-year US bonds, which is more sensitive to interest rate prospects, closed at 4.63%, falling nearly 12 basis points during the day, marking a two-day consecutive decline of nearly 49 basis points from the intra-day high reached on Thursday, the highest since June 2007.

The US dollar index fell below 100 for the first time in over a year during intra-day trading, hitting a new intra-day low since April 14th last year. Offshore renminbi rose above 7.15 for the first time in over three weeks during intra-day trading, and the yen rose for the sixth consecutive day.

Supported by the weakening of the US dollar, various bulk commodities have risen. Most base metals, led by London copper, continue to rise. Gold is approaching a one-month high, and crude oil has risen for three consecutive days. WTI August crude oil futures closed up 1.50%, reaching the highest closing price since April 25th.