Macro event comment: The Fed’s tone is tight and the market does not buy it.

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event:

At 2:30 am on July 28th, Beijing time, the Federal Reserve issued a meeting on the interest rate meeting to maintain the federal funds rate target range unchanged at 0.25%-0.50%, in line with expectations; voting result was 9-1, Kansas City Federal Reserve Governor EstherGE orge supports a 25 basis point rate hike; the only part of the statement with substantial adjustments is the economic assessment, and the changes are not unexpected.

Comments:

1. The economic evaluation is positive. In response to the non-farm payrolls data for June, the Fed’s assessment of the current state of the US economy has clearly improved. New employment has been strong in June, the job market has strengthened, and economic activity has expanded moderately; household spending has grown strongly, but corporate fixed-asset investment has continued to weaken.

2. The economic outlook is cautiously optimistic. After the British referendum retired, the global financial market returned to normal soon after short-term fluctuations, and the market was loosened by the global central bank, the sovereign government bond interest rate fell, the US stock index hit a new high, and the economic indicators also showed that the short-term economy has not been affected by the Brexit. The Fed stressed that “the short-term risks of the economic outlook have weakened”.

3. The outlook for interest rates is cautious. Nine of the FOMC's ten voting officials supported the maintenance of the federal funds rate, and only Kansas City Federal Reserve Chairman George supported a 25 basis point rate hike. Since the beginning of this year, George agreed not to raise interest rates in 1/6, and supported the interest rate hike in March/April/July. The views were partial to the hawks; but other officials have maintained a position of no interest rate hike.

4. After the announcement of the interest rate meeting, the US government bond interest rate fell, the 10-year government bond interest rate fell from 1.56% to 1.5%; the federal funds rate futures market showed that the probability of the Fed rate hike decreased, the interest rate hike in December fell from 49.2% To 45.2%, the probability of raising interest rates for the first time over 50% is in March next year; the US dollar exchange rate first rose and then fell, the precious metals bottomed out, and the S&P 500 index rose slightly.

5. Although the interest rate meeting statement is positive, the Fed’s rate hike probability has declined. There are four reasons for this: 1 Under the influence of the Bank of England, the European Central Bank, and the Bank of Japan, the market has not held much hope for the Fed. The content of the statement is basically within the market expectation; in the case of excessive market sentiment, no bad news is good news; 2 recent crude oil prices have dropped significantly due to the rise of the original US stocks and the increase in the number of crude oil drilling, WTI crude oil prices From $50/barrel to $42/barrel, it will pose a threat to the inflation outlook of the United States and even the world. 3 Recently, global geopolitical risks have risen, and events such as the South China Sea geopolitical disputes, European terrorist attacks, and US shootings have emerged one after another. Objectively weaken the probability of the Fed raising interest rates; 4 The impact of the British referendum on the UK and the global economy is not immediately apparent, but as the process of the Brexit negotiations gradually works, the prospects for global economic growth are not optimistic.

Attachment: Fed's June meeting on interest rate meeting statement in English and Chinese:

InforMAT ionreceived since the Federal Open Market Committee met in JuneAprilindiCAT es that the labor market established and that economic activity has been expanding at a moderate rate. Job gains were strong in June following weak growth in May. OnBA lance, payrolls and otherlabor market indicators point to some Increase in labor utilization in recentmonths.the pace of improvement in the labor market has slowed while growth in economic activity appears to havepicked up. although the activity rate has declined, job gains havediminished. Household spending has beengrowing stronglyGrowth in householdspending has strengthened. Since the beginning Of the year, the housing sectorhas continued to improve and the drag from net exports appears to havelessened, but business fixed investment has been soft. Inflation hascontinued to run below the Committee's 2 percent longer-run objective, partlyreflecting earlier declines in energy prices and in Prices of non-energyimports. Market-based measur Es of inflation compensation remain lowdeclinedmost survey-based measures of longer-term inflationEXPE ctations are littlechanged, on balance, in recent months.

Information received since the June meeting of the Federal Open Market Committee (FOMC) shows that the labor market has strengthened and economic activity has been moderately expanding. After the weakness in May, employment growth was strong in June. Overall, employment and other labor market indicators show that labor utilization has increased in recent months. Resident expenditure has been growing strongly, but corporate fixed asset investment continues to be soft. The inflation rate continues to be below the 2% long-term goal of the Commission, partly reflecting the decline in energy prices and non-energy import prices. Market-based inflation compensation indicators remain low; most of the survey-based long-term inflation expectations are generally flat in recent months.

Consistentwith its statutory mandate, the Committee seeks to foster maxiMU m employmentand price stability. The Committee currently expects that, with gradualadjustments in the stance of monetary policy, economic activity will expand ata moderate pace and labor market indicators will strengthen. Inflation isexpected to remain low In the near term, in part because of earlier declines inenergy prices, but to rise to 2 percent over the medium term as the transitory effectss of past declines in energy and import pricesDIS sipate and the labormarket strengthens further. Near-term risks to the economic outlook have Diminished. The Committee continues to closelymonitor inflation indicators and global economic and financial developments.

Consistent with the Fed's statutory duties, the FOMC committee aims to maximize employment and price stability. The committee currently expects that with the gradual adjustment of monetary policy, economic activities will expand moderately and labor market indicators will continue to strengthen. Inflation expectations will remain low in the short term, partly due to earlier energy price declines. However, with the temporary deterioration of energy and import prices and the further strengthening of the labor market, medium-term inflation is expected to rise to 2%. The short-term risks of the economic outlook have weakened. The Commission continues to closely monitor inflation indicators and the development of the global economic and financial situation.

Against the backdrop, the committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remainsaccommodative, such supporting further improvement in labor market conditions and a return to 2 percent inflation.

In this context, the committee decided to maintain the target range of the federal funds rate at 0.25-0.5%. The monetary policy stance remains accommodative, supporting further improvements in the labor market situation and a return of inflation to 2%.

Indetermining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2percent inflation. This assessment will take into account a wide range ofinformation, including measures of Labor market conditions, indicators ofinflation pressures and inflation expectations, and reADI nGS on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions willevolve In a manner that will warrant only gradual increases in the federalfunds rate; the federal funds rate is likely to remain, for some time, belowlevels that are expected to prevail in the longer run., the actual path of the federal funds rate will depend on The economic outlook as informed byincoming data.

As for the timing and size of future federal funds rate target range adjustments, the committee will assess actual and expected economic conditions relative to employment maximization and 2% inflation targets. The committee will consider various information during the assessment process, including labor market conditions, inflationary pressures and inflation expectations, financial markets and international market development. Given that the current inflation rate is below 2%, the Commission will pay close attention to the development of actual and expected inflation towards inflation targets. The committee expects that the economic situation will be developed to ensure that the federal funds rate will only increase gradually, and the federal funds rate may remain below the long-term neutral interest rate for a period of time. However, the actual path to the federal funds rate will depend on the economic outlook shown by future data.

TheCommittee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities and back anticipates doing so until normalization of the level of the federal funds rate is This policy, by keeping theCommittee's holdings of longer-term securities at sizable levels, should helpmaintain accommodative financial conditions.

The committee will maintain the rolling investment policy of institutional deposits, institutional mortgage-backed securities held by the Federal Reserve, and then invest in institutional mortgage-backed securities and reinvested after the auction of expired government bonds. The committee is expected to maintain the policy until the federal funds rate. The normalization of the level has made smooth progress. Under this policy, the committee will hold a large amount of long-term securities, which will help maintain a moderately loose financial environment.

Votingfor the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Esther L. George; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; And Daniel K. Tarullo. Votingagainst the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.

Among the votes voted at this FOMC meeting are: Chairman Yellen, Vice Chairman Dudley, Brenner, Brad, Fisher, Mestre, Powell, Roseng Green, Tarullo. Kansas City Federal Reserve Chairman George voted against him and he preferred to raise interest rates by 25 basis points at the meeting.

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