Although discussions have taken place on how to ease monetary policy, the Federal Reserve is not in a hurry to cut interest rates at present.

On January 31st local time, at the first interest rate meeting of 2024, Federal Reserve Chairman Powell stated that officials would remain patient in taking action to ease monetary policy.

"We have not declared victory over inflation at all," Powell said. He emphasized the need to see "more" data confirming the trend of inflation continuing to decline. "I think it is unlikely that the committee's confidence will reach a level that justifies a rate cut before the March interest rate meeting," he added.

At the same time, the Federal Reserve's statement also removed the phrase "may further tighten policy." The Federal Reserve emphasized that when considering any adjustments to the target range of the federal funds rate, the committee would carefully assess upcoming data, changing prospects, and the balance of risks. The committee expects that it would be inappropriate to lower the target range before having more confidence in inflation's sustained progress toward 2%.

In the afternoon of January 31st local time, data from the Chicago Mercantile Exchange showed that the market believed the probability of the Federal Reserve cutting interest rates in March had dropped to about 35%. This is lower than the 59% before the Federal Reserve's interest rate decision was announced. The proportion was as high as 89% a month ago.

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Affected by this, on January 31st, U.S. stocks fell across the board, with the Nasdaq Composite Index recording its largest single-day drop in nearly three months. International gold prices rose and then fell, giving up all intraday gains by the close. As of 5 p.m. Beijing time, the international gold price was reported at $2,042.00 per ounce.

In the Asia-Pacific market, as of the close on February 1st, the onshore renminbi's spot exchange rate against the U.S. dollar fell by 37 points to 7.1832 yuan, hitting a new low in over a week. The offshore renminbi closed at 7.1950, approaching the 7.2 threshold. The Shanghai Composite Index reported at 2,770.74 points, down 0.64%.

The market expects the Federal Reserve to cut interest rates in May.

The Federal Reserve has kept the benchmark federal funds rate unchanged for four consecutive interest rate meetings. Since March 2022, the Federal Reserve has raised interest rates at the fastest pace in 40 years to combat inflation that has risen to a 40-year high.

Inflation and employment are the dual goals of the Federal Reserve's monetary policy. Currently, the Federal Reserve needs to balance two risks: first, if the pace of easing monetary policy is too slow, the economy collapses under the pressure of high interest rates, leading to unemployment for millions; second, if the pace of easing monetary policy is too fast, inflation could re-accelerate, causing it to remain above the 2% target level.The current situation is that the economic growth momentum in recent months has been stronger than expected by Federal Reserve officials, which may make some officials cautious about declaring a "victory over inflation."

Goldman Sachs' macroeconomic analysis believes that the possibility of a U.S. economic recession in 2024 is only 15%. The driving force is the continuous heating up of the U.S. job market and wage growth that exceeds inflation, which will support the continuous recovery of the U.S. consumer sector and thus promote the increase in the U.S. Gross Domestic Product (GDP).

The U.S. GDP increased by 3.3% in the fourth quarter of 2023, far exceeding the market's expected 2%. At the same time, looking at the consumer sector, which accounts for 70% of the U.S. GDP, U.S. retail data increased by 0.6% month-on-month in December 2023, the largest increase in three months, twice the previous value of 0.3%, and also exceeded the market's expected 0.4%.

Data from the U.S. Bureau of Labor Statistics shows that during 2023, workers' pay increased by 4.2%. In the fourth quarter of 2023, private sector wages increased by 4.3% year-on-year.

In the second half of 2023, the U.S. six-month annualized inflation rate fell below 1.9% from 4% in the first half. In December 2023, the Federal Reserve's favorite core Personal Consumption Expenditure (PCE) fell to 2.9%.

However, it should also be noted that although the Federal Reserve is not in a hurry to cut interest rates, it has paved the way for rate cuts and a slowdown in balance sheet reduction. Powell stated that "almost all" committee members believe that it is appropriate for the Federal Reserve to start cutting interest rates in 2024. He also said: "We plan to start an in-depth discussion on the balance sheet issue at the next meeting in March."

Goldman Sachs has postponed its expectation for the first interest rate cut by the Federal Reserve to May, but still expects 5 interest rate cuts in 2024. UBS said that the Federal Reserve will start its first interest rate cut in May, with a total of 100 basis points cut in 2024. If the Federal Reserve wants to maintain a rate path of cutting interest rates by 100 basis points or more, inflation needs to cool further. Bank of China Hong Kong also believes that the Federal Reserve will start cutting interest rates as early as May to ensure a soft economic landing.

International gold prices rose and then fell.

In the financial market, the Federal Reserve's monetary policy affects China's foreign exchange, stock, and commodity markets by affecting the interest rate spread between China and the United States. To a certain extent, it also affects the monetary policy of the People's Bank of China (hereinafter referred to as "the central bank") from the outside.

Previously, the expectation of interest rate cuts by the Federal Reserve heated up, causing the interest rate spread between China and the United States to converge. As of January 26, the interest rate spread between China and the United States narrowed to below 160 basis points, down about 70 basis points from the previous high. However, as of February 1, with the rise in U.S. Treasury rates, the interest rate spread between China and the United States gradually climbed, and it has now risen above 150 basis points.In the foreign exchange market, which is greatly influenced by the international market, on February 1st, the onshore Renminbi (RMB) exchange rate against the US dollar opened at 7.1766 and then depreciated all the way, reaching a minimum of 7.1848. By the close, it fell by 37 points, hitting a new low since January 22nd. The offshore RMB also showed a similar and more pronounced downward trend, closing at 7.1950 yuan, with the current onshore and offshore RMB price difference at 114 points.

A trader stated that the Federal Reserve has severely damaged market expectations for a rate cut in March, with the US Dollar Index strengthening, putting pressure on Asia-Pacific currencies in general. Additionally, the market anticipates that China will adopt a loose monetary policy, which also widens the interest rate differential between China and the US. "However, in the Chinese market, the current market risk appetite is relatively low. Although the China-US interest rate differential will suppress the rebound trend of the RMB, the regulatory stance is strong, and the RMB exchange rate will not easily depreciate. This can be seen from the central parity rate," he said.

On January 30th, the yield on China's 10-year government bond fell to 2.48% during the trading day, a new low since June 2002. Goldman Sachs expects that in 2024, China's monetary policy will see two rate cuts and two reserve requirement ratio (RRR) cuts, totaling a 20 basis point reduction. According to Reuters calculations, on February 1st, the RMB central parity rate is expected to depreciate to around 7.1802 yuan, with regulatory measures expected to continue strong filtering, supporting the RMB exchange rate.

Zhang Bin, a senior researcher at CF40 and Deputy Director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, believes that to address insufficient demand, the People's Bank of China's monetary policy needs to clearly tell the market that it will target a core consumer price index (CPI) of 2%. "This is actually telling residents to spend their money quickly, or prices will rise. It is equivalent to telling businesses that future prices will rise, your income will increase, profits will increase, and costs will also increase, so you should invest quickly," he said. "This is a very important method to change expectations, which can increase consumption and investment and reduce savings."

In terms of the stock market, on February 1st, the three major A-share indices showed divergent trends. By the close, the Shanghai Composite Index reported at 2770.74 points, down by 0.64%. However, both the Shenzhen Component Index and the ChiNext Index closed higher.

Some analyses believe that although the Federal Reserve has hinted that there will be no rate cut in March, a rate cut will eventually be initiated. From China's perspective, the macroeconomic recovery, improving profits of A-share listed companies, and A-shares being at the bottom of their valuations are all factors that are conducive to a rebound from the bottom for A-shares.

Zhang Shiqi, Head of Wealth Strategy and Analysis at Bank of China (Hong Kong), believes that with the end of the US dollar's interest rate hiking cycle and the alleviation of external pressures, A-share valuations are expected to rise. At the same time, as China's economy transitions towards high-quality development and the short-term economy continues to recover, a solid economic foundation for the stock market is established. "After two consecutive years of adjustment, whether compared horizontally with other stock markets or vertically with its own historical performance, the current stock-bond price ratio reflects that A-shares are at a cyclical and historical low valuation from multiple perspectives, so investment opportunities are expected to emerge in 2024," she said.

Goldman Sachs maintains an "overweight" stance on China's A-share market in 2024, predicting potential returns of 18% for the MSCI China and 19% for the CSI 300 Index in 2024. Under optimistic conditions, foreign capital is expected to increase its holdings of Chinese stocks (including A-shares, Hong Kong stocks, and US ADRs) by $70 billion.

Regarding commodities, Zhang Shiqi stated that in a rate-cutting cycle, the logic for gold being favorable is quite certain. In 2024, the excess return on gold investment depends on the timing of entry. Since the market has already priced gold quite fully, and there is a high expectation for the US dollar rate cut, when there is a gap between the actual rate-cutting process in Europe and America and market expectations, gold may have opportunities for periodic adjustments.