Sinolink Securities: Powell's debut encounter with hawkish turn, Fed's interest rate hike risk rises next year.

CICC released a research report stating that the Federal Reserve kept interest rates unchanged at its June meeting, in line with market expectations. In terms of policy for the year, Powell did not provide clear guidance, but the dot plot clearly turned hawkish: the mean forecast calls for one rate hike this year, reflecting stable employment and high inflation, with inflation resistance becoming the focus. The judgment is to maintain the Federal Reserve's decision not to raise or lower rates this year, but it hints at increasing the risk of rate hikes next year. If the U.S. economy continues to strengthen under AI capital spending and experiences a full recovery, the possibility of monetary tightening is not ruled out. CICC pointed out that the biggest change in this meeting was in reform. The monetary policy statement was significantly simplified and forward guidance was removed, aiming to reduce the Fed's intervention in the market. More importantly, five working groups on communication, balance sheet, data, productivity and employment, and inflation framework were established, reshaping the policy framework from basic principles, laying the institutional groundwork for Powell's conservative and market-oriented policy approach. Among them, the balance sheet assessment ranked second, indicating that balance sheet reduction remains a core focus. Powell launches reform, ushering in a new era for the Federal Reserve This meeting was the first FOMC meeting chaired by Powell since he took office as chairman of the Federal Reserve, with the most prominent change being that Powell has begun to push for reform, aiming to reshape the Federal Reserve's old ways of working. Firstly, the length of the monetary policy statement was significantly shortened, with the previous wording being greatly reduced and forward guidance being removed. Powell explained in his opening statement that the new statement is only "to give facts as much as possible," and forward guidance is not suitable for the current policy environment; this move is not intended to make the market directionless, but to open a "new chapter" in central bank communication, allowing the market to make judgments based on real economic data and financial prices themselves. Powell emphasized that financial markets are an important source of information guiding central bank decisions, and if the market trades around Fed rhetoric and then reflects the Fed's signal back to the Fed, the central bank will lose its most important source of information. Therefore, the removal of forward guidance is to reduce the Fed's "reverse intervention" in the market, in line with the intention to reduce the Fed's footprint in the financial markets. More importantly, the main line of medium-term reform is now very clear. Powell announced the establishment of five independent task forces covering Federal Reserve communications, balance sheet policy, data usage, productivity and employment, and inflation framework. The task of each working group is not to make minor adjustments, but to start from basic principles, examine current practices, propose alternative solutions, and develop next steps for policymakers to consider. Specifically: 1) The Communication Working Group discusses how to improve Federal Reserve communication in form and function, including deleting forward guidance, adjustments related to the Summary of Economic Projections (SEP), etc. 2) The Balance Sheet Working Group will assess the benefits and risks of the current ample reserve system, the composition of the balance sheet, and whether alternative monetary policy frameworks will be needed in the future. 3) The Data Working Group will assess new sources of information and data collection methods, aiming to provide more accurate, timely, and actionable economic information for policy-making. 4) The Productivity and Employment Working Group will examine the development speed and economic impact of new general-purpose technologies, including artificial intelligence (AI), and discuss the implications of these changes for the Fed's pursuit of its dual mandate of employment and inflation. 5) The Inflation Framework Working Group will study the driving factors of inflation, starting from first principles, comprehensively evaluating various approaches to achieving price stability in the context of a constantly changing economy. CICC believes that the above five working groups are laying the institutional groundwork for Powell's policy restructuring: in the short term, reducing forward guidance, and in the medium term, through a comprehensive reevaluation of communication methods, balance sheet tools, data systems, economic structures, and inflation frameworks, gradually shaping a more market-dependent Federal Reserve with fewer predetermined commitments. This path is consistent with Powell's conservative and market-oriented policy philosophy. Furthermore, with other Fed officials still holding considerable influence within the Federal Reserve, the five working groups may become a key lever for Powell to reshape the Fed by leveraging external experts. By introducing external forces, Powell can gradually transform his personal policy ideas into a reform agenda that can be discussed and implemented within the Fed, thereby shifting the policy direction and further strengthening his influence within the Fed. Therefore, the motivation behind Powell's push for reform should not be underestimated. Of particular note is that the evaluation of balance sheet policy ranks second among the five areas, second only to communication reform. This means that adjustments to the balance sheet still hold a relatively central position in Powell's overall reform agenda, and the market should not underestimate Powell's willingness and feasibility to reduce the balance sheet. CICC reiterates its previous view: Powell's appointment marks a significant watershed for Federal Reserve monetary policy. There has been a fundamental change in the U.S. macro-financial environment, with the era of massive monetary easing since 2008 coming to an end. The method of liquidity injection may shift from relying on external money expansion by the Fed and fiscal expansion to an internal money system driven by corporate capital spending and credit expansion. The Fed is no longer the "global central bank" endlessly providing liquidity to the world, but is shifting towards firmly controlling the total money gate, focusing on domestic productivity development, and emphasizing monetary sovereignty. Dot Plot Turns Hawkish, Rate Hike Risks Increase In terms of monetary policy for the year, Powell did not provide clear guidance, but the dot plot indicates a shift towards a "hawkish" stance. While Powell intends to weaken forward guidance through reform, the dot plot was temporarily retained at this meeting however, he did not submit any rate forecasts personally, and CICC expects that he will probably not participate in the dot plot in the future. This arrangement indicates that Powell hopes to downplay the influence of the dot plot, and it cannot be ruled out that the dot plot will be abolished in the future. Even so, the existing dot plot still sends a strong signal: the mean forecast points to one rate hike this year. Of the 18 members, 9 believe that at least one rate hike is needed this year, with 6 members advocating for at least two rate hikes, and only 1 member insisting on a need for rate cuts. This is a clear shift towards a hawkish stance compared to the forecast of one rate cut this year in the March dot plot. The reason for the officials turning hawkish is the stabilization of employment and persistently high inflation. According to the latest economic forecasts, officials have revised their year-end unemployment rate forecast from 4.4% to 4.3%, while the overall PCE inflation forecast has been significantly raised from 2.7% to 3.6%, and the core PCE inflation has also increased from 2.7% to 3.3%. This indicates that officials believe that the risks in the second half of the year are mainly on the inflation front, and monetary policy will focus on controlling inflation. This is in complete agreement with CICC's medium-term outlook report. For the market, this means that most Fed officials are not willing to have policy "lag behind the curve." Reflected in asset prices, this leads to a significant increase in the yield on two-year U.S. Treasury bonds, while the yields on 10-year and 30-year bonds remain largely stable, flattening the yield curve. However, this does not mean that the Fed will immediately hike rates; it is more of a clear signal of anti-inflation in the context of high inflation. In addition, Powell himself may not wish to hike rates swiftly, and among the Fed governors, individuals like Rosengren, Bowman, and Powell may not necessarily lean towards rapid tightening. This means that even if several hawkish regional Fed presidents want to push for rate hikes, it may not be an easy task. CICC maintains its previous assessment that the Federal Reserve will neither cut nor raise rates this year, but the risks of rate hikes next year are increasing. The reason for not hiking rates this year is that current inflation is still structural and there are no clear signs of economic overheating. However, if the U.S. economy continues to strengthen in the second half of the year under the traction of AI capital spending and experiences a full recovery, the possibility of rate hikes in the first half of next year cannot be ruled out. Looking ahead for the next year, CICC believes that the probability of the next rate hike being greater than a rate cut. This implies that U.S. interest rates will remain high, and the U.S. dollar exchange rate will be supported. [Charts and data from the Federal Reserve and CICC Research Department are shown, detailing the Federal Reserve's monetary policy statement, economic indicators forecast, and the June dot plot.]