Fed Chairman Sticks to Inflation Target, Hints at Continued Rate Hikes

At the highly anticipated global central bank annual meeting, the Fed Chairman delivered a brief but hawkish speech. He reiterated his determination to bring inflation down to the 2% target and stated that he would continue to take strong measures to balance supply and demand in order to reduce inflation.

The chairman emphasized that the Fed's goal is to raise interest rates to a level that restricts economic growth and to maintain that level for a period of time. He warned that prematurely easing policies could have serious consequences.

Although no specific magnitude of the rate hike in September was explicitly mentioned, the chairman stated that "another significant rate increase may be appropriate." This statement leaves room for a 75 basis point rate hike in September.

Despite the improvement in inflation data for July, the chairman believes this is not enough to change the Fed's policy path. He stated that the Fed will not change its stance based on just one or two months of data, as the current inflation situation remains severe.

The chairman warned that while an economic recession is not inevitable, continuing to raise interest rates will inevitably cause a certain degree of "pain" to the economy. He emphasized that restoring price stability takes time, which may lead to a period of economic growth below trend levels, and the labor market may also show signs of weakness.

It is worth noting that the chairman directly denied the market's expectation of interest rate cuts starting in the second half of 2023. On the contrary, he stated that "by the end of next year, the benchmark interest rate will be only slightly below 4%".

The chairman also emphasized the importance of managing inflation expectations. He pointed out that if high inflation persists for too long, people's expectations of continued rising inflation may become entrenched, creating a vicious cycle between inflation and public expectations.

Although the chairman mentioned that "at some point, it may become appropriate to slow down the pace of interest rate hikes", this hawkish statement still triggered a violent reaction in the financial markets. Major U.S. stock indices fell sharply, U.S. Treasury yields rose, the dollar index strengthened, and gold prices dropped.

The futures market's expectation for the Fed to raise interest rates by 75 basis points in September has also significantly increased, rising from about 45% before the speech to over 60%. This indicates that the market is reassessing the Fed's future policy direction.