Last week, the Federal Reserve ended its two-day monetary policy meeting and announced that it would suspend interest rate hikes and keep the target range of the Federal funds rate unchanged at 5.0% to 5.25%, in line with market expectations. This is the first pause in the Federal Reserve's interest rate hike cycle. Since the Federal Reserve launched this interest rate hike cycle in March 2022, it has raised interest rates 10 times, with a cumulative increase of 500 basis points. From the perspective of rate hike rhythm, a single rate hike gradually increased from 25 basis points to 75 basis points, and there were four consecutive rate hikes at the 75 basis point level, which is the fastest rate hike in nearly 40 years. In February of this year, the Federal Reserve slowed its interest rate hike for the first time to 25 basis points. In terms of forward-looking interest rate guidance, the Federal Reserve stated in this statement that it will keep the target range unchanged at its June meeting, allowing the committee to evaluate more information and its impact on monetary policy.

01 | Faced with still high inflation, why is the Federal Reserve suspending interest rate hikes at this time? Federal Reserve Chairman Powell told the media after a two-day interest rate meeting that the full impact of tightening policies has not yet been apparent, and the Federal Reserve is much closer to its goal of reducing inflation. Slowing down the pace of interest rate hikes is reasonable. The Federal Open Market Committee, the decision-making body of the Federal Reserve, issued a statement after the meeting, saying that the suspension of interest rate hikes allowed the committee to assess more information and its impact on monetary policy. The committee will consider the cumulative tightening of monetary policy, the extent to which monetary policy lags behind economic activity and inflation, as well as economic and financial trends. Economist Desmond Rahman from the American Enterprise Research Institute told Xinhua News Agency that there are signs that the US economy is cooling down and the financial system is facing enormous pressure after a significant interest rate hike. The Federal Reserve's suspension of interest rate hikes is "reasonable". The Federal Reserve has been "soaring" on the path of interest rate hikes, pushing interest rates to their highest level in 16 years, making the inhibitory effect on economic growth even more apparent. According to the report of the The Conference Board, the Consumer confidence index declined in May, and consumers' assessment of the current employment situation showed a "serious deterioration". The radical interest rate increase of the Federal Reserve also brought shock to the banking industry, triggering the closure of Silicon Valley Bank and Signature Bank in March, and the closure of the First Republic Bank in early May. Dean Mackey, Chief Economist at Point72 Asset Management, a hedge fund, believes that the bank closure has made the Fed's rate hikes less aggressive than before.

02 | The suspension of interest rate increase by the Federal Reserve does not mean the end of this round of interest rate increase. According to the latest quarterly economic forecast released by the Federal Reserve on the 14th, the median forecast of the Federal Reserve officials for the Federal funds rate at the end of this year is 5.6%, significantly higher than the 5.1% forecast in March. The "dot chart" shows that out of 18 Federal Reserve officials, 12 believe that interest rates should be raised to at least 5.5% to 5.75% by the end of this year, and 3 of them believe that interest rates should be higher. This means that the Federal Reserve still has 50 basis points of room for interest rate hikes this year. Michael Gabon, the chief American economist of Bank of America, said that it was surprising that the Federal Reserve officials' forecast of the Federal funds rate this year was 50 basis points higher than that in March. He expects the Federal Reserve to raise interest rates by 25 basis points in July and September, respectively. There are also predictions that the Federal Reserve will raise interest rates by another 25 basis points this year. The Federal Reserve has not yet made a decision on whether to raise interest rates at the July monetary policy meeting, but the Chicago Mercantile Exchange Federal Reserve observation tool showed that as of the evening of the 14th local time, traders expected that the probability of the Federal Reserve raising interest rates by 25 basis points in July had exceeded 70%. Powell stated that achieving inflation targets is likely to require the economy to bear some pain, as the "boots" of economic recession cannot be left behind, making it difficult for monetary policy to turn and a new economic cycle to start. He also stated that it would be appropriate for the Federal Reserve to cut interest rates only after inflation has significantly decreased, and no committee member expects a rate cut this year.

03 Jingtai View | At present, the market's concern about the banking crisis has not eased United States Secretary of the Treasury Yellen said that the banking industry may be merged. As of the week ending June 7th, the use of the Federal Reserve Bank Term Funding Program (BTFP) exceeded $100 billion, rising for five consecutive weeks. This indicates that the US banking industry has not yet emerged from the "liquidity dilemma". In addition, if the US Treasury subsequently raises a large amount of debt to enrich cash flow, it will not only exacerbate the problem of deposit outflows in the banking industry, putting greater liquidity pressure on banks, but may also push up short-term loan and bond rates, further increasing the financing costs of enterprises that are already under pressure in a high interest rate environment. Although inflation in the United States has eased, core services other than rent, as well as core goods such as second-hand cars, still have strong stickiness. The "second half" of the fight against inflation may be even more challenging: on the one hand, the benefits brought by improved supply are being exhausted, and the current energy prices are basically stable, leaving limited room for inflation to continue to decline. On the other hand, demand driven inflation remains stubborn, and the still tense labor market has led to strong market demand. In the case of a mismatch between supply and demand, the difficulty of reducing inflation in the United States will further increase.