Overnight, the Federal Reserve’s July interest rate meeting released its outcome. Bitcoin remained unfazed and continued its path of recovery since July 25, experiencing a slight rebound to the $29.5k level.
Before the meeting, the market showed little volatility, possibly because the well-managed expectations were already fully digested and assimilated.
From a technical perspective, a rate hike is negative, but the transition from the expectation of a rate hike to its actual implementation can turn it into a positive.
From a macro standpoint, a rate hike is negative, but the end of the rate-hiking cycle can be understood as a positive.
The market doesn’t directly reflect positives or negatives; its reaction is determined by the difference between facts and expectations, combined with people’s subjective interpretations of that difference.
The end of the rate-hiking cycle. The Fed’s swan song.
In the FOMC statement, the Federal Reserve first emphasized the stability and resilience of the U.S. banking sector. The implicit message was that our banks can handle rate hikes without collapsing, so there’s no need to worry—of course, the underlying reason is the Fed’s unlimited “BTFP” (Backstop Treasury Facilities Program) as a safeguard. Following that, it was mentioned that credit tightening in real estate and business sectors has shown effects on economic activity, employment, and inflation. This statement acknowledges economic downturn, weak employment, and declining inflation. However, it was quickly added that the continuity of these effects remains uncertain. The committee still maintains a high level of vigilance concerning inflation risks. The final two sentences imply an unwillingness to give up the inflation card and readiness to play it at any time.
The subsequent paragraphs are the usual rhetoric. As expected by the market, a 25-basis-point rate hike was implemented, raising the federal funds rate to 5.25-5.5%.
As for the monthly reduction of $600 billion in U.S. treasuries and $350 billion in mortgage-backed securities (MBS), the pace remains unchanged. The approach is still to deduct the necessary reduction during reinvestment roll-off (no active “repurchasing” required).
As usual, Powell will hold a press conference after the meeting to explain the outcome. This is an essential method for guiding market thinking and implementing expectation management.
Key points from Powell’s remarks: They can stop rate hikes before inflation reaches 2%. No rate cuts are expected this year. Core inflation remains high, so higher rates need to be maintained for some time. No decisions were made regarding future meetings, and there’s no plan to hike rates every other meeting. The impact of rate hikes hasn’t fully materialized, and future policy will be based on data.
Apart from preserving maximum decision-making flexibility for the Federal Reserve (as it’s never advisable to lock down the flexibility for future policy decisions in advance) and reiterating that rate cuts are not expected this year (as the market has already anticipated), Powell did express some dovish sentiments, admitting that there’s no need to keep hiking rates until inflation reaches the target of 2%.
The market’s expectations for the September interest rate meeting have been reflected, with nearly 80% expecting no rate hike and 20% expecting another 25 basis points increase.
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