The Zhitong Finance App learned that Guojin Securities released a research report saying that the minutes of the September FOMC meeting showed that the Fed believes that greater uncertainty about the economic outlook will mean that monetary policy needs to be more cautious. The September CPI report shows that inflation stickiness is still stubborn. Supercore inflation has continued to rise for three months and has risen to a high level of +0.61%, and repeated geopolitical friction means an increase in the expected volatility of oil prices. If we further consider the high GDP forecast for 23Q3 and the further increase in inflation stickiness in the fourth quarter, the bank maintains its judgment of skipping interest rate hikes in November and raising interest rates by 25 bps in December, and believes that by the end of June next year, the Fed will not have sufficient and necessary conditions to cut interest rates.

The main views of Guojin Securities are as follows:

Federal funds rate: Traders expect the probability of interest rate hikes in November to be only 6.2%, the probability of cumulative interest rate hikes in November-December falls to 30.4%, and interest rate cuts are expected to advance to June 2024.

① Short-term interest rate hike expectations: According to the CME federal funds futures model, traders expect the probability of a rate hike in November to be 6.2% and the previous week's closing to 18.3%; the probability of a cumulative interest rate hike in November-December fell to 30.4%, and the previous week's closing was 35.2%. Affected by oil prices, the September CPI announced on Thursday (+0.4% month-on-month, expected +0.3%, previous value +0.6%) slightly exceeded expectations, and supercore inflation continued to rise month-on-month, and inflation stickiness continued to strengthen. Dallas Fed Chairman Logan said in his speech that if long-term interest rates remain high due to term premiums, the need to raise interest rates may decrease.

The bank believes that on the surface, there is a “logical dead cycle” in Logan's statement — if interest rates on US bonds are too high will reduce the need to raise interest rates, then the Fed's statement itself will likely depress interest rates on US debt. This in turn makes it more necessary to raise interest rates. Therefore, the bank is more likely to think that Logan's dovish statement stems more from concerns that interest rates on US debt have recently “risen too fast” rather than just “rising too high.”

Given that the big data released recently did not let the Fed raise interest rates in November, and as the November FOMC meeting approached, the Fed did not show any intention to correct market expectations not to raise interest rates in November, so the bank maintained the view that interest rates would not be raised in November.

However, at the same time, given the high quarter-on-quarter annual rate forecast for 23Q3 US GDP announced on October 26 (Bloomberg analysts unanimously forecast +3.0%, Fed's GDPNow model forecast +5.1%), and the probability that the October CPI announced in November will be affected by another rotation of the health insurance base period has risen again. The bank still tends to think that the Fed will implement the guideline that the Fed will raise interest rates by 25 bps within the fourth quarter shown in the September bitmap. That is, the Fed may still raise interest rates in December.

Of course, given that this expectation is always fluctuating, and that the current policy interest rate level is high enough but may not last long enough, the bank also believes that whether to raise interest rates in December is not the point; the time for interest rate cuts to begin may be even more important. ② Remote interest rate cut expectations: The CME federal funds futures model shows that under the current interest rate level of [5.25, 5.5]%, traders expect the first interest rate cut to be in June 2024. The bank still tends to think that this expectation is too optimistic. If the US economy has not fulfilled its recession by the end of June next year, and the Fed does not believe that the inflation target has been achieved, then the bank believes that the Fed does not have sufficient and necessary conditions to cut interest rates in the next three quarters, and the market's current overly optimistic interest rate cut expectations will likely be delayed.

Federal Reserve balance sheet: Other credit guarantee instruments continued to fall rapidly, and net liquidity was replenished for the third week in a row.

This week, the total assets of the Federal Reserve fell by 3.354 billion dollars to 800 trillion US dollars. ① Asset side: Securities assets decreased by 1.903 billion US dollars to 7411 trillion US dollars (all from US Treasury bonds). Loan instruments declined by $4.52 billion to $174.6 billion. By category, major loans, BTFP, and other credit guarantee instruments added -1.93 billion, 12.19 billion US dollars, and -5445 billion US dollars, respectively. Looking at terms, loan instruments for 1-15 days, 16-90 days, and 91 days to 1 year added US$53.7, 0.5, and 890 million US dollars, respectively. ② Debt side & net assets: This week, the Fed's debt decreased by US$78.297 billion to US$4.69 trillion (reverse repurchases decreased by US$102,263 billion to US$1.53 trillion, TGA increased by 34.041 billion to US$713 billion), and bank reserve balances increased by 74.943 billion to US$3316 trillion. The amount of net liquidity invested by the Federal Reserve increased by 65 billion US dollars over last week.

Risk warning:Financial system risks are once again fermenting; inflation is falling less than expected; and the Federal Reserve is increasing its austerity.