CICC: Cutting interest rates in the short term will further increase the possibility of a soft landing in the United States.

CICC released a research report indicating that the Federal Reserve will cut interest rates by 50 basis points in the September meeting, and the monetary policy statement emphasizes the goal of maximizing employment. The Fed's actions show that its reaction function has shifted completely from focusing on inflation to focusing on employment. Officials have a low tolerance for rising unemployment rates and do not want to jeopardize the prospect of a "soft landing" due to excessive tightening. Looking ahead, the Fed may maintain a dovish stance until the employment market stabilizes. The rate cut in the short term will further increase the possibility of a soft landing in the US, but the policy combination of loose fiscal policy and loose monetary policy may also increase medium-term inflation risks. CICC's main points are as follows: The background of this meeting is a slowdown in US inflation over the past two months, coupled with signs of weakening in the job market. The market wants to know how the Fed will respond to these marginal changes and what its reaction function is. Before the meeting, the market had already fully anticipated this rate cut, and the uncertainty was whether the cut would be by 25 or 50 basis points. In terms of interest rate decisions, the Fed took a more aggressive cut of 50 basis points, compared to the expected 25 basis points. The monetary policy statement pointed out that recent inflation data have given policymakers more confidence in achieving the 2% inflation target. At the same time, as the unemployment rate rises, the Fed also emphasizes its commitment to maximizing the employment goal (The Committee is strongly committed to supporting maximum employment...). The Fed's actions show that its reaction function has shifted completely from focusing on inflation to focusing on employment. Fed Chairman Powell said at the August Jackson Hole meeting, "We're not looking for a slowdown in job growth." Following the mixed August nonfarm payroll data, although the unemployment rate decreased compared to July, the increase in nonfarm employment continued to slow down. Clearly, Powell believes that this change has triggered the situation he spoke about, so he wanted to fulfill his commitment and push for a 50 basis point rate cut at this meeting. Although Powell denied victory over inflation at the press conference, he now seems to only focus on employment. Powell said he hopes the unemployment rate will stay at its current level and not continue to rise. Fed officials also predict that the unemployment rate will further rise by 0.2 percentage points by the end of this year, to 4.4%. In 2025 and 2026, the unemployment rate is expected to stabilize around 4.4%. This is a signal that the Fed has a low tolerance for rising unemployment rates, and officials do not want to risk jeopardizing the prospect of a "soft landing." Based on Powell's statement, any unemployment rate exceeding 4.4% in the future may trigger further rate cuts. This also indicates that the Fed will maintain a dovish stance until the data in the job market stabilizes. According to the latest dot plot, out of the 19 officials, 10 predict at least two more rate cuts by the end of this year, 7 predict only one rate cut, and 2 predict no more cuts. This shows that most officials lean towards the need for further rate cuts by the end of the year to ensure that the unemployment rate remains within the full employment range of 4.4% or below. However, the 50 basis point rate cut this time is not a consensus among all. Out of the 12 voting officials, 11 voted in favor, while Governor Bowman voted against it, leaning towards a 25 basis point cut. This is also the first time a Fed governor has voted against a rate cut since 2005. Additionally, after the release of the August nonfarm payroll data, Fed officials did not clearly signal a 50 basis point rate cut until the start of the "quiet period" last week, indicating hesitancy among decision-makers on whether to cut rates by 25 or 50 basis points. Looking ahead, due to the Fed's more aggressive rate cut, the likelihood of an economic soft landing in the short term will further increase. As previously pointed out, historical soft landings are usually accompanied by rate cuts, as moderate adjustments to monetary policy after significant tightening help avoid excessive tightening. This time, with improvements in supply factors and short-term manageable inflation risks, the Fed's rate cut will support demand expansion, and the US economy may continue to grow at a relatively high pace, increasing the chances of a soft landing. Fed officials have lowered their inflation forecasts in the latest projections while keeping their economic growth forecasts unchanged, indicating their confidence in a soft landing. However, in the medium term, the US policy combination of loose fiscal policy and loose monetary policy may increase inflation risks. The latest data from the US Treasury Department shows that the fiscal deficit in August increased to $380.1 billion, an increase of $136.3 billion from the previous month and $469.3 billion from the same period last year. In terms of year-on-year change, the increase in the fiscal deficit in August was the highest level in the past three years. In addition, the cumulative fiscal deficit for January to August 2024 has reached $1.39 trillion, an increase of $28 billion from the same period last year, a 25% increase. These data indicate that this year's fiscal policy has not tightened but continued to expand. Expansionary fiscal policy already has a stimulating effect on the economy, and with the Fed now taking more aggressive rate cuts to reduce the unemployment rate, this may lead the economy back to a "no landing" state in the medium term. If supply factors do not improve further by then, a rebound in demand could push up inflation. Today, after the Fed interest rate meeting, US bond yields rose instead of falling, with a steepening yield curve, which may also reflect the market's concerns about the long-term inflation risks of the Fed's aggressive rate cuts.