As expected, the FOMC held rates steady in September but raised rate projections for the next two years, signaling higher-for-longer.
FOMC
Since this is the first time this account discusses the FOMC (Federal Open Market Committee), let's briefly explain what it does and why it's also called the rate-setting meeting. As the official website states, "The FOMC holds eight regularly scheduled meetings during the year and other meetings as needed." These meetings cover topics like rate hikes, cuts, balance sheet expansion/contraction, QE/QT, etc. The FOMC typically has 12 voting members: 7 governors, the New York Fed president, and 4 regional Fed presidents.
Here is the FOMC meeting schedule.
At each meeting, Chair Powell emphasizes the Fed's dual mandate: maximum employment and price stability. The members recognize the hardship caused by high inflation and are committed to bringing inflation back to 2%.
The 2% inflation target is crucial—not just as a goal for price stability, but as the bedrock of the Fed's credibility. If markets suspect the Fed will abandon this target due to financial market volatility or economic weakness, the Fed's resolve and effectiveness would be questioned.
At the July meeting, the Fed raised rates by 25 bps and continued balance sheet reduction, bringing the federal funds rate to 5.25-5.50%.
Recent balance sheet trends
At the last meeting, the Fed said it would "continue to take a data-dependent approach," meaning future economic data would heavily influence rate decisions. Based on current data, the outlook is not optimistic.
The most important CPI data came in slightly above expectations, moving further from the 2% target:
- Expected: CPI +3.6% YoY, +0.6% MoM; Core CPI +4.3% YoY, +0.2% MoM.
- Actual: CPI +3.7% YoY, +0.6% MoM; Core CPI +4.3% YoY, +0.3% MoM.
Oil prices continue to climb, with OPEC+ cuts and China's demand recovery likely to push prices higher, signaling strong future inflation expectations.
US Government Shutdown
On Friday, September 15, a spokesperson for the Bureau of Labor Statistics (part of the Department of Labor) said:
If the federal government shuts down, the Bureau will suspend data collection, processing, and dissemination. Once funding is restored, normal operations will resume.
With the Republican-controlled House preparing to block a continuing resolution, a federal government shutdown on October 1 is highly likely. Given the deep partisan divide, the shutdown could last weeks or longer. The lack of fresh data—and potential distortions from delayed statistics—could complicate the Fed's November and December meetings.
The September data, due for release in October, is critical—not only as a key input for the Fed's next rate decision but also as a vital indicator for market analysis of Q3 US economic performance. Markets generally expect strong Q3 growth, with inflation easing overall, a resilient labor market, and supported consumer spending—all pointing toward a "soft landing."
The Fed has always emphasized making decisions based on the latest data. Markets widely expect the Fed to hold rates steady at next week's meeting, but November remains uncertain.
Unlike government agencies, the Fed is self-funded and does not rely on government appropriations. It continued operating during past shutdowns, and regional Feds without federal employees will also continue to publish surveys on manufacturing and business conditions. Even so, Fed policymakers will also monitor a range of third-party data that will still be released.
Pre-Meeting
Before the meeting, the CME FedWatch Tool showed that a pause was almost a certainty.
Thus, the key focus was on the post-meeting statements and Powell's tone—whether hawkish or dovish—which would directly influence market expectations for future rate hikes and thus equity market moves.
The first rate cut expectation was for June 2024
Decision
At 2:00 AM ET on Thursday, September 21, the FOMC decided to hold rates steady. This marks the 11th rate hike in this cycle, the second pause (after June's pause followed by a July hike). Whether the Fed will resume hiking at the November meeting remains to be seen.
Post-meeting, the FedWatch Tool showed the probability of a November hike stable at 33%
The probability of skipping November and hiking in December rose from 35% to 40%.
However, the Fed's dot plot indicated one more rate hike this year. The FOMC statement said 12 officials expect another hike this year, 7 expect no change, and the expected pace of rate cuts next year was reduced.
The dot plot showed the median federal funds rate at 5.6% for end-2023, 5.1% for end-2024, and 3.9% for end-2025 (vs. 5.6%, 4.6%, and 3.4% in June), with 2.9% for end-2026 and a long-run rate of 2.5%.
In response, the three major US stock indices fell sharply, with a late-session selloff. The tech-heavy Nasdaq Composite suffered the largest decline, as tech stocks are most sensitive to rate hikes.
Impact on Chinese Stocks
Monetary Policy:
For the People's Bank of China, it has been waiting for the Fed to cut rates. Only when the US cuts rates will China have room to adjust its monetary policy and ease pressure on the exchange rate—for example, by implementing a broad-based rate cut to support the economy. For now, China must endure, using various monetary tools to maintain适度宽松. The same applies to the stock market.
Northbound Capital:
US Treasury yields and the dollar index will likely remain elevated, which will suppress global equity markets. As I discussed earlier in "A Quantitative Strategy Based on Northbound Capital Flows in A-Shares," in the current environment, mutual funds and private equity funds have limited capacity to increase positions. Incremental capital can only come from northbound flows, unless a stabilization fund intervenes. Otherwise, the market will likely remain range-bound with low volume. If the market continues to prop up heavyweight stocks, some sectors may even see net outflows.
We must closely monitor US economic data. Until early next year, we should not expect rate cuts. Chinese stocks are unlikely to see a sustained recovery until the economic recovery becomes clear. Stay patient and wait for the turnaround.
