CITIC Securities: Maintains baseline expectation that the Fed will keep rates unchanged at the September meeting, awaiting data guidance

According to Zhitong Financial APP, CITIC Securities released a research report stating that in this Jackson Hole speech, Walsh focused on defending the Federal Reserve’s duty and determination to fight inflation, taking a more hawkish stance compared to his remarks at the July FOMC meeting. Market expectations for a rate hike in September have significantly increased, but based on the bank’s outlook for U.S. inflation and economic growth trends, CITIC maintains its baseline judgment that the Federal Reserve will keep rates unchanged at the September meeting, with future inflation and employment data being critical. In the short term, revived market expectations for rate hikes are pushing up the dollar and weighing on gold, but in the medium term, declining long-term real rates still support gold price elasticity on the upside.

CITIC Securities' main views are as follows:

Matters:

Federal Reserve Chairman Walsh delivered a speech at the Jackson Hole meeting on August 28. The bank believes that his remarks were more hawkish than those made after the July FOMC meeting, but he also provided moderate clarification of the core principles of monetary policy execution, with the situation not worsening.

This is a pre-prepared speech, likely reviewed multiple times. Any potential market impact from this speech should have been carefully considered by U.S. officials.

Compared to sending dovish signals, exchanging "temporarily higher short-end rates" for "medium-term stability in long-end rates" is a more controllable way for U.S. officials to reduce rate market volatility at present. In light of this speech from Walsh and the Treasury's recent expansion of the U.S. Treasury buyback program—both measures effectively capping long-term term premiums—the bank believes there is no immediate catalyst to significantly push up long-term U.S. Treasury term premiums.

The more hawkish tone is reflected in two areas:

1) He noted that “although this summer’s PCE and CPI prints were better than expected, they do not tell me that the underlying trend has meaningfully improved;” inflation is still “above the bank's 2% target,” and “... must be confident that underlying inflation is moving clearly and at sufficient speed toward the bank’s goal... otherwise, there is still much work to do.”

2) He argued that “it is hard to describe broader financial conditions as restrictive.” In contrast, at the June press conference, when asked whether financial conditions were tightening, he deferred this question to various working groups.

Clarifications of monetary policy execution principles include three points:

1) On market doubts about the future of the Federal Reserve’s inflation target, this speech stated, "There should be no misunderstanding: the Federal Reserve’s price stability target of 2% using the Personal Consumption Expenditures (PCE) index is a steadfast and fixed target."

2) Regarding changes in the selection of inflation indicators, this speech focused on PCE components with more than a 3% weight, which appears to be a more objective inflation measure compared to his earlier attempt to use trimmed mean PCE.

3) After previous ambiguity regarding which tools the Federal Reserve should rely on to achieve its goals, the speech clarified, "Short-term interest rates are the primary tool for achieving the dual mandate,” and explicitly stated, "Higher inflation will require a higher federal funds rate in response," emphasizing the priority of the federal funds rate over the balance sheet.

These clarifications regarding the target principles are somewhat beneficial for reducing term premiums and potential market volatility. Additionally, he spent a substantial portion discussing the economy, sounding more professional than before; as for doubts about abandoning forward guidance, he offered no significant new explanations and did not commit to a clear “reaction function.”

Maintaining the baseline judgment that the Federal Reserve will stand pat in September, with future inflation and employment data being crucial.

This Jackson Hole speech by Walsh focused on defending the Federal Reserve’s duty and determination to fight inflation, and reiterated the Federal Reserve’s dual mandate, taking a more hawkish stance compared to his July FOMC remarks. Market expectations for a September rate hike have increased significantly, but based on the bank’s forecasts for U.S. inflation and economic growth, CITIC maintains its baseline judgment that the Federal Reserve will keep rates unchanged in September. In the short term, revived expectations for rate hikes are pushing the dollar higher and putting pressure on gold, but in the medium term, the decline in long-term real rates still supports gold’s price elasticity on the upside (albeit with a slower slope).

Risk factors:

If there are unexpected escalations in future U.S.-Iran conflicts or if long-term rates rise again due to inflation risk premiums, under the inflation theme of "Affordability" central to the U.S. midterm elections, the risk that the Federal Reserve will be compelled to hike rates in advance to stabilize financial markets is increasing (though at most, only a symbolic hike within this year); also, if the job market is stronger than expected.