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The Chairman of the Federal Reserve of the United States delivered an important speech at 0:20 am Beijing time on October 15th, so what everyone is concerned about is whether his words are positive or negative?
Powell's speech contained a lot of information. Although he did not provide specific news about interest rate cuts, it emphasized an important key issue: there is currently no "risk-free" path for monetary policy. This means that there are risks in the Fed's interest rate cuts, and there are also risks in not cutting them. However, this statement itself already indicates his attitude, indicating that he holds an open attitude towards interest rate cuts because he has determined that there are significant risks in not cutting them. Secondly, the future direction of monetary policy will be driven by data and risk assessment, which is known as speaking based on data. However, the key point is that he mentioned that "the downward risk of the US job market has increased", which means that the job market is weakening. The key is that he did not raise the issue of inflation rebounding much, but instead focused on employment risks. This signal is obvious, suggesting that he may now value the health of employment more than focusing on inflation. The reason for saying this is because Powell also explained later that "the rise in commodity prices mainly reflects tariffs, not ordinary inflationary pressures". Powell has always believed that the inflation caused by tariffs is a one-time occurrence and will pass in the past, while ordinary endogenous inflation is more troublesome. Now blaming tariffs is equivalent to saying that the current inflation problem is a short-term phenomenon and not a big problem. In this way, the reasons for removing obstacles to interest rate cuts are even more sufficient.
Another important signal, Powell mentioned, is that the balance sheet may shrink or come to an end in the coming months. What is balance sheet tightening? Simply put, it means that the Federal Reserve has been collecting funds and repaying debts. If this action stops, it means that the liquidity in the market will no longer be drained as before,. The liquidity in the market will be more abundant, and even leave some room for speculation about whether there will be a new round of container expansion and water release in the future.
Summary: Although Powell's speech today was cautious, it still leaned towards the dovish camp overall. Although it is still determined by the data, the implication of the speech content is already clear enough, which is to lay the groundwork for future interest rate cuts.
So the probability of a rate cut this month is still 97.8%, and there will be two more rate cuts this year.
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