No suspense in pausing rate hikes? Tonight, focus on the Federal Reserve.

Tonight, the Federal Open Market Committee (FOMC) of the Federal Reserve will announce its November interest rate resolution. It is basically a foregone conclusion that it will continue to stand still. However, as the financial environment is further tightened due to the continuous surge in US bond yields, * * most Wall Street investment banks believe that the current interest rate hike cycle is over, and the debate has turned to how long interest rates should remain at the current restrictive level * *. At 14:00 p.m. Eastern time on Wednesday, November 1 (02:00 a.m. Beijing time on Thursday, November 2), the Federal Reserve will announce its November interest rate resolution, followed by Federal Reserve Chairman Powell's monetary policy press conference. The major investment banks on Wall Street agree that the Fed will continue to keep interest rates unchanged, making it the first time since the current interest rate hike cycle that it has not raised interest rates for two consecutive months. The main focus of the market will be Powell's subsequent press conference. At the same time, the probability of raising interest rates in December has also declined slightly in recent days, and more investors have begun to bet that the Fed has "stopped raising interest rates".! Analysts generally expect that the policy statement and Powell's press conference may release a neutral attitude, both emphasizing that the fight against inflation is not over, opening the door to further rate hikes, but suggesting that there is no rush to raise interest rates again, will remain patient and continue to assess future economic data. Nomura economists are arguing that as U.S. Treasury yields remain at historically high levels, the impact of soaring yields on the U.S. economy will be a major issue for the Fed, **the current level of yields is equivalent to two Fed rate hikes of 25 basis points, so the current cycle of rate hikes is over. But Barclays economists say not every Fed official believes rising Treasury yields mean the Fed has finished raising rates, and they believe the FOMC will maintain a hawkish tone in its statement and eventually raise rates again by 25 basis points in December. **According to the latest CME Fed Watch, the Fed has a 97.7 percent probability of keeping interest rates unchanged in the 5.25-5.50 percent range in November and a 25 basis point rate hike to the 5.50-5.75 percent range with a 2.3 percent probability. The probability of maintaining interest rates unchanged by December is nearly 70 per cent, the probability of a cumulative 25 basis point rate hike is about 30 per cent, and the probability of a cumulative 50 basis point rate hike is 0.2 per cent. The resilience of the U.S. economy will also make the "last mile" of inflation reduction longer, with the market delaying the Fed's first 25 basis point rate cut until July 2024.! ## Three changes in the U.S. financial environment may make the Federal Reserve end its interest rate hike Nomura pointed out in the report that since the September FOMC meeting, there have been three major changes in U.S. finance, and the gradual tightening of the financial environment may make the Federal Reserve continue to hold back. **First, US economic data remains strong. * * The annualized quarter-on-quarter initial value of US real GDP in the third quarter released last week increased by 4.9 per cent year-on-year, more than double the 2.1 per cent in the second quarter, exceeding market expectations by 4.7 per cent, showing that economic growth in the third quarter rebounded significantly from the first half of the year. According to other data, new orders for durable goods increased by 4.7 per cent month in September due to increased demand for aircraft. The initial value of Markit manufacturing PMI in October showed that. **Second, inflation cooling faces greater resistance and inflation expectations have rebounded. **Last week's September PCE price index fell back to 3.4 per cent year-on-year, but growth was flat at 0.4 per cent month-on-month, while core PCE fell back to 3.7 per cent, rebounding to 0.3 per cent month-on-month growth from 0.1 per cent last month. In a month-on-month sense, inflation is still showing greater stickiness. In addition, the University of Michigan's 1-year consumer inflation expectations for October, released last week, jumped sharply to 4.2 percent from 3.2 percent the previous month, and long-term inflation expectations rose to 3.0 percent from 2.8 percent the previous month, suggesting that consumers believe future inflation may not fall back soon. **Third, U.S. bond yields have risen sharply, making financial conditions significantly tighter. **The 10-year yield on U.S. debt has continued to rise over the past month, hitting a high of 5 percent. The rise in interest rates overlaid with increased geopolitical conflict, to increased investor concerns about the economic outlook, the three major U.S. stock indexes continued to fall, and financial conditions tightened significantly. For the Fed, rising market interest rates reduce the need for further tightening, **and Fed officials, including Powell, have hinted that the rise in U.S. bond yields could be a substitute for a rate hike to some extent. **San Francisco Fed President Mary Daly has previously said that higher U.S. bond yields have done some of the work in place of the Fed, equivalent to a rate hike, and may not have to tighten policy further. Overall, Morgan Stanley pointed out that although the current US economic activity is still strong, the Fed is not expected to see an improvement in the economic outlook in its interest rate statement. The FOMC has been emphasizing that "tighter credit conditions could be a drag on the economy", and now the economic environment has tightened further, with the Palestinian-Israeli conflict adding to the uncertainty. The FOMC's statement is likely to include: "The impact of the Israeli-Palestinian conflict on the U.S. economy is highly uncertain, but in the short term, conflict-related events may cause additional upward pressure on energy prices, thereby dragging down economic activity_". _## How does Powell respond at the press conference? Analysts generally believe that Powell will be asked by reporters whether he agrees with the committee's September prediction that there will be another rate hike before the end of the year. He may say that whether or not to raise interest rates in the future still depends on the data, and there is a lag in the role of monetary policy, and the economy has not yet felt the full impact of interest rate hikes. Nomura pointed out that, on the whole, strong economic data still poses a risk to inflation, Powell can not give up the hawkish tone, but the tightening of financial conditions or make the Fed more cautious. Morgan Stanley expects the tone of Powell's speech to be similar to his speech at the Economic Club of New York: There are risks to the economic outlook, and our financial conditions have tightened since the September FOMC meeting, equivalent to a 75 basis point Fed rate hike:> We expect Powell to reiterate that uncertainty in the future environment will make our task of balancing the risks of excessive tightening and easing of monetary policy more complicated. ## How do U.S. stocks go? Investors are no strangers to the "seesaw" relationship between U.S. stocks and U.S. bond yields. In August last year, the 10-year U.S. bond yield took less than three months to soar from 2.6 percent to above 4 percent. Affected by the Fed's continued interest rate hike and economic recession expectations, U.S. stocks last year hit their worst year since 2008. A year later, U.S. bond yields rose again in July this year, quickly breaking from 3.8 percent to 5 percent in the short term. According to statistics from the financial data company FactSet, as of October 27, 49% of the S & P 500 index constituent companies have disclosed their third-quarter financial reports, and 78% of the companies' earnings per share are better than market expectations, slightly higher than the five-year average of 77%. However, Meta and Google, which are among the top in market value, fell 7% and 12% respectively in the two days after the list was released. Peter Oppenheimer, chief global equity strategist at Goldman Sachs, said the U.S. stock market is currently facing greater and more concentrated risk than other major markets, with cash and fixed income becoming more attractive as U.S. bond rates rise, and the dramatic outperformance of the U.S. stock market over the past 10 years is unlikely to be repeated in the next 10 years **:> the excellent performance of US stocks reflects to a certain extent the advantages of the United States in the field of technology and the domination of US stocks by a few technology giants. The stock market also accounts for a much higher share of the U.S. economy than elsewhere, and investors should now diversify their investments.>> The more attractive nature of other assets, such as cash and fixed income, will discourage market holdings.