Early this morning, Beijing time, the Fed's September FOMC meeting ended. Not surprisingly, the Fed raised interest rates again by 75bp, bringing the benchmark interest rate (the federal funds rate) to 33.25%, the third big 75bp rate hike since June.

However, the market is more concerned about the neutral interest rate offered at the meeting and the remaining end point of the rate hike than the fully anticipated rate hike itself, which will directly determine whether the 10-year US Treasury interest rate will hit a new high and whether US stocks will hit a new low.

Since the Jackson Hole meeting at the end of August, especially since the release of inflation data in August, there has been a marked increase in concerns that the Fed will have to accelerate tightening further, and the resulting pressure on US Treasuries and US stocks.

Therefore, the meeting is also seen by the market as a key verification point to some extent.

At this point, the meeting is more "hawkish".

The updated forecast for neutral interest rates remains unchanged at 2.5%, but the bitmap's forecast for the end point of interest rate hikes by the end of this year has risen sharply to 4.4%, compared with 4.6% in 2023.

In addition, Powell's emphasis on controlling inflation and concerns about future growth and recession pressures also raised concerns in the market. As a result, the market and major assets fluctuated repeatedly, with the US stock market falling after the decision and rising sharply after Powell said it was likely to slow interest rate increases in the future, but then quickly closed down about 1.7 per cent again.

At the same time, 10-year US bond interest rates rose 3.6 per cent and returned to around 3.5 per cent, while the dollar index soared to 111.

Obviously, the fluctuation of assets and the differentiation between different assets are very intense.It also shows the wobble and divergence of expectations between austerity and recession fears.

In view of the specific content of this meeting, especially the possible impact on future assets, we comment as follows.

一、9The monthly interest rate increase itself is in line with expectations, but the end point of the interest rate increase is higher.Weaker forecasts for economic prospects

The change in the statement of this meeting is very limited, there are only a few minor changes in wording, and the 75bp rate increase has basically become the market consensus after the Jackson Hole meeting and the August CPI data (even at one point there were expectations of a rate hike 100bp), so the market is more concerned about the Fed's view of the future path of raising interest rates and the pressure on economic growth on this basis.

At this point, the market does not get much comfort.

Although the neutral interest rate remained unchanged at 2.5 per cent, the median bitmap given by the committee members rose sharply from about 3.4 per cent of FOMC in June to about 4.4 per cent of the meeting, which means that compared with the current benchmark interest rate level, most members expect at least more interest rate increases than 100bp or even 125bp, which means that the remaining two meetings (November and December) need to raise interest rates 50bp and even 75bp.

CME interest rate futures are expected to raise interest rates 50bp at the two meetings respectively. In addition, interest rates for 2023 have risen sharply to 4.6 per cent from 3.8 per cent of FOMC in June.

This level is slightly higher than the end point of around 4.25% at the end of the year, which is based on inflation.By matching the inflation and interest rate hike paths, as well as the Taylor rule, we estimate that the target for interest rate hikes at the end of the year may be around 4.25%.

The 4.4% result released by this bitmap at the end of the year is slightly higher than the level we expected and the market forecast of 4.25% to 4.5% before the meeting. Considering that the PCE forecast given by the Federal Reserve is also lower than our estimate (this meeting raised the year-end PCE inflation forecast from 5.2% to 5.4%, we estimate it to be about 6%)This may indicate that Fed members are becoming less tolerant of inflation and hope that more advance and aggressive interest rate increases will quickly achieve the goal of curbing inflation.Therefore, it also illustrates the negative reaction of US stocks and the sharp rise of the dollar.

The outlook for the economy is more cautious.

Under the more aggressive path of raising interest rates, the Fed also lowered its forecast for growth accordingly, with real GDP growth falling sharply to 0.2% in 2022 from 1.7% in June, reflecting negative quarter-on-quarter growth in the previous two quarters.

At the same time, Powell also said at a press conference after the meeting that with the aggressive increase in interest rates, the possibility of a soft landing is decreasing (The chances of a soft landing are likely to diminish), and that he does not know whether it will cause a recession (No one knows whether this process will lead to a recession).

This statement of caution or even lack of confidence in growth has increased the market's confidence.Fear of recessionIt also explains why interest rates on long-end Treasuries briefly shot up and then quickly fell back to 3.5%.

二、Future path: higher has become a reality, but can it be further? Observe whether there will be a turning point in the fourth quarter.

Fed policy has been trying to strike a balance between inflationary pressures and recession risks, causing asset prices to wobble repeatedly. The market fears that this window is narrowing over time and with sustained aggressive interest rate hikes.

At a time when inflation remains stubbornly high and core inflation exceeded expectations in August, there is no doubt that the Fed can only choose the former. A higher rate rise has become a reality, but the question is whether it can last longer. When can there be a turnaround when the rate of interest rate hike slows down?Clearly, it depends on the speed at which inflation falls and when the recession comes.

We estimate that inflation remains high in the third quarter but is expected to fall back quickly after the fourth quarter.

Due to the lack of a high base, it will be difficult for inflation to fall effectively until September. However, after September, with a rapidly rising base, continuous easing of superimposed supply chain constraints (reflected in the fact that the US has entered the active destocking phase of "recession and profit pressure in the US from the inventory and capacity cycle", a significant fall in freight rates, and improved delivery time for PMI) and oil prices remain basically at current levels, CPI is still expected to fall back quickly to 6 per cent from the current 8 per cent or so.

Even if endogenous demand variables (such as wages and rents) are more sticky, their impact is more likely to range from 4% to 2% (current inflation leaves about 4% after deducting energy and food and physical consumer goods affected by the supply chain).

What's more, even if the core, which seems to be very sticky, especially service prices, a number of high-frequency indicators have shown obvious signs of decline (such as rent, used cars, air tickets, NFIB price changes, etc.; some large enterprises have begun to lay off staff, etc.), but there is a certain time lag, which still needs some time to reflect.

At the same time, we expect recessionary pressures to increase gradually after the fourth quarter.

After the interest rate hike, 2s10s is further down to around-50bp, and 3m10s and 20bp (3.3% for 3-month Treasuries and 3.5% for 10-year Treasuries). We estimate that as interest rate hikes advance and growth pressures increase, 3m10s spreads, as well as real financing costs and return on investment, are likely to shift upside down, which could also mean that recessionary pressures rise after the fourth quarter.

Therefore, after September is still the key time to see whether the tightening can retreat.If there are more signs of falling inflation, then market expectations can be interpreted towards a gradual easing of tightening and growth pressure has not yet fully escalated, on the contrary, it may put more pressure on the market.In the process, the biggest downside risk still comes from unexpected supply shocks.The emergence of unexpected supply shocks will not only make the inflation path out of control and force the Fed into a corner, but also put more pressure on growth, which in turn brings greater downside risks to the market.

三、Asset impact: cash continues to win; pay attention to the chain effect of the reduction of "cheap money"

From an asset impact point of view, the meeting strengthened short-term tightening expectations and is likely to increase concerns about tightening and growth pressures. As a result, the current situation will not be fully alleviated until a high base can effectively bring down inflation in October.We maintain our view that cash (USD) has continued to win since August.。

1) insufficient valuation protection for US stocks may still face some correction needs.The current valuation near 16 times the average value is not supported by the denominator, but the concern about profit on the molecular side may be heightened by a quick increase in interest rates. We estimate that the reasonable valuation is about 14-15 times.However, we have not turned to complete pessimism.The main reason is that under the assumption that it is not a deep recession, the decline in earnings can be hedged by the monetary policy of subsequent decline.

2) interest rates on US debt may rise due to the dual effects of strong interest rate increases and weak growth (for example, 3.7% to 3.8%), but it is also difficult to stay high for a long time.Around 3.5% is still a relative constraint. However, short-end interest rates and real interest rates are still likely to rise.

3) the dollar is on the strong sideTight monetary policy, relative growth advantages, weaker import demand and tighter offshore dollar liquidity are all likely to continue to support the dollar

4) Gold may be supported by fears of inflation and recessionBut we still don't think it has the value of a substantial overmatch.

In addition, we need to pay attention to the knock-on effect of the continued strength of the US dollar and the continued tightening of global offshore dollar liquidity (less "cheap money").The depreciation of exchange rates in major emerging markets is only one of the most direct and explicit manifestations. Against the backdrop of rising US dollar financing costs, those who lack the certainty of future cash flows and whose balance sheets are not sound"marginal assets"It will continue to be damaged and under pressure on capital outflows, with particular attention to the risk of gray rhinos turning into black swans. On the contrary, cash flow returns and balance sheets are robust"core assets"It will continue to be a haven with few capital options, but we should also pay attention to the problem of high valuations.

Against this backdrop of tighter overall liquidity, emerging market exchange rates and capital outflow pressures are not inevitable and do not depend entirely on the loosening of their own monetary policy.Passive austerity does not address the root causes. If loose monetary conditions can be effectively transmitted to growth, it can offset the pressure of exchange rate depreciation, but if it cannot be effectively transmitted into growth, the accumulated liquidity will bring more pressure.