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Are Interest Rate Cuts Coming? Signals Point to an 80% Chance of US Rate Reduction in 2023

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The U.S. hawks have softened. The expectation of an interest rate cut this time is basically a certainty, and it is likely that next year it will enter the structure of global interest rate cuts.

And the possibility of an interest rate cut next year is as high as 80.8%!

Why do you say that?

Let’s see a very interesting change.

On December 1, Federal Reserve Chairman Powell publicly sounded a hawk, saying that it was too early to discuss interest rate cuts and easing policies.

To put it bluntly, it means “I’m going to raise interest rates again!”

But in just the past two weeks, Powell’s attitude has undergone a huge change. Although the Federal Reserve announced at the monetary policy meeting on December 13, local time, that the interest rate target range will remain unchanged between 5.25% and 5.5%.

But Powell seemed to have forgotten how harshly he spoke at the beginning of the month. In his speech after the meeting, he publicly rebelled, saying that we should discuss cutting interest rates.

I looked back and picked it up this time, and I don’t know what I found, but it must have slipped into someone’s pocket.

This is also seen as an important signal that the U.S. interest rate hike cycle is coming to an end.

It is said that at this juncture in the struggle with Mrs. Yellen of the U.S. Treasury Department, the Federal Reserve has not given in yet, but as the Fed’s toughest hawk, why did Powell give in first?

Fed: I am about to fight to the death, why does my lord surrender first? !

So what happened in the two weeks from December 1st to December 12th that caused Powell to undergo this change?

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I think this next is the most important signal of expectations for a U.S. interest rate cut, and it is also the key reason for Powell’s change.

On the day of the press conference, in addition to Powell hinting at interest rate cuts, the Federal Reserve also released an economic outlook report.

In this investigative report, there is a series of speeches from an organization that is very awesome but not usually very “well-known”.

That is the expected attitude of the Federal Open Market Committee.

Of the 19 members of the Open Market Committee, 13 people came forward to express their opinions.

Among them, 6 people believe that interest rates may drop to 4.5% to 4.75% next year, 5 people expect interest rates to drop to 4.75% to 5%, and only 2 people believe that interest rates will remain at the current level next year.

Of the 13 people on the market committee, 11 said they would cut interest rates, and the other two said they could not raise interest rates.

According to the committee’s expectations, the Fed will have to cut interest rates almost three times next year, based on 25 basis points each time.

Then a friend asked, what kind of organization is this “Federal Open Market Committee”, and why can it say what it is? ?

Let me tell you what these big guys do.

This committee is a management organization affiliated with the Federal Reserve System. Its main task is to determine U.S. monetary policy and achieve a balance between economic growth and price stability through the regulation of monetary policy.

To put it bluntly, it is a committee with American characteristics.

But its authority is not the focus of NB, the focus is his personnel list.
Not all members of the Market Committee are federal officials. In addition to the seven members of the Board of Governors of the Federal Reserve System, it also includes the presidents of 12 Federal Reserve Banks, including the New York Reserve Bank, the feudal official who “does not listen to propaganda.” Bank president.

The seven members of the Federal Council plus the president of the New York Reserve Bank are the eight-person standing committee of this organization, and then four of the remaining 11 reserve bank presidents will be selected to form the enlarged meeting.

These 12 seats not only represent the attitude of the federal finance, but also directly represent the attitude of the highest bank capital group in the United States.

It can be said that if the Federal Reserve is the father of other banks and investment banks in the United States, then the Market Committee is almost the father of the Federal Reserve.

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It is not only the representative of the government, but also the collective will of the government, official capital and private capital groups.

Now half of such “big dads” have publicly stated that they expect to cut interest rates. This has an unprecedented impact on Powell and the Federal Reserve.

I have said many times before that if we want to do policy analysis, then the character and stance of the decision-maker are very important reference standards. This has been true at all times and in all countries.

There are fundamental differences between the current Powell and the former Yellen.

Yellen is first an economist and then a politician. For Yellen, politics is her operational tool for economic adjustment.

This is called economists engaging in politics.

Powell is just the opposite . He is a pure politician first, and then the chairman of the Federal Reserve. For him, economic work is an operational tool for his own political interests.

This is called politicians doing economics.

If Yellen were in office, although the opinions of the Marketing Committee would also have an impact, they would definitely not be so big because Yellen is so stubborn and she really dares to be tough!

The reason why she became the first Fed chairperson in history who cannot be re-elected is because she was tough on Trump and was unwilling to sacrifice social economy for political demands.

Powell is just the opposite. The key to his ability to secure this position is that he is obedient and dares to lick.

At a time when the contradiction between federal fiscal expansion and the Fed’s liquidity contraction was acute, he firmly supported the contractionary camp.

But now that the market committee has spoken, the most important signal behind it is that the interests of the federal finance and the Fed bosses have begun to converge, so it is not surprising that Powell has turned from a hawk to a dove in an instant.

It’s not about economics, it’s about stance.

Therefore, data released by the FedWatch Tool (CME Fed Watch Tool) on the second day after the 12th press conference directly showed that the probability of the Federal Reserve cutting interest rates in March next year doubled overnight, from 41.3% to 41.3%. 80.8%.

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Overnight, the probability of a rate cut next year has formed an overwhelming advantage, and 80.8% is only a little away from being certain.

Why the Market Committee reached a consensus at this time and began to put pressure on the Federal Reserve? The truth is always confusing, and we can only make a few speculations based on known objective conditions.

First: The U.S. economy may have encountered a huge problem , but it was covered up before and now it has to turn around.

This can be seen from the speech seats of the Market Committee. A total of 13 seats have expressed their opinions. Even assuming that all 7 official seats advocate an interest rate cut, there are at least 6 Fed bank presidents who also said that they will cut interest rates at the same time, or that they cannot add more.

You must know that there are only 12 Reserve Bank seats in the United States, and at least half of them have publicly spoken out against raising interest rates.
It can be seen from this point that the long-term high interest rates and tightening environment have caused huge objective pressure on the U.S. banking industry. This pressure not only comes from the collapse of bank balance sheets, but may also indirectly come from the private economy’s impact on banks. The industry’s profit output capability has declined.

Second: It may be that the depression and asset offset situation in other countries can already solve the problem of economic growth in the United States.

In layman’s terms, it means cutting enough.

In the past few years, not only because of the conflict between Russia and Ukraine, Ukraine sold all its national assets to the United States, but the United States also pulled out the oxygen pipes of Europe.

Argentina has recently sacrificed itself for justice and is about to mortgage its country to the United States.

So under these conditions, on the one hand, a large amount of interests are harvested from Europe through various energy and financial outlets; on the other hand, the “38th Line” between Russia and Ukraine may soon be formed, and Ukraine and Argentina will be able to realize it soon.

At the same time, the financial war with China has been going on for half a year, but both sides have suffered losses.

So it is obviously more cost-effective to give up when things get better now, quickly search for European assets, and realize the benefits of Ukraine and Afghanistan than to continue to fight with China.

Third: It may have a lot to do with the upcoming election.

Quoting a report from the Wall Street Journal: In the first half of this year, the market’s expectations for interest rate cuts were too high, and the US Secured Overnight Financing Rate (SOFR) futures (green line) fell all the way. At the same time, US President Biden’s approval rating (red line) also fell simultaneously;

Starting in August, SOFR began to skyrocket. By December, Biden’s approval rating began to plummet. At this time, the Fed suddenly changed its face. Powell no longer suppressed interest rate cut expectations at the press conference after the interest rate resolution, and SOFR plummeted.

The American people’s tolerance for the era of high interest rates has reached its limit. A large number of middle-class people have been downgraded, and household balance sheets are struggling. Politically, coupled with Comrade Sichuan Jianguo’s “cooperation inside and outside”, this may directly affect Biden’s election.

As a relatively special president in the history of the United States, Biden is the president of the United States who is most likely to be coerced by the emperor to order the princes. Therefore, ensuring that such an old treasure is on top is of great significance to the military coalition, Wall Street, and the medical coalition. meaning.

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But these are all domestic affairs of the United States. What significance does this strong wave of interest rate cut signals have for us?

It means a lot!

In the long process of raising interest rates in the past, the United States has artificially created a large-scale liquidity crunch around the world, which is obviously not the result of free market pricing.

A large number of high-quality assets have actually had their liquidity artificially reduced, pushing them into a price trough.

The price is lower than the value, which is called a value depression.

It can be said that the profit curve of global asset investment is a curve that deviates from the mirror image of the US dollar index.

Once the U.S. dollar enters a downward channel next year and liquidity begins to become abundant again, global asset prices will inevitably usher in a round of high-speed expansion like a spring.

This is a cyclical deterministic opportunity. Respecting the cycle is the most important prerequisite for seizing the opportunity.