The Federal Open Market Committee (FOMC) of the United States decided to keep the policy interest rate unchanged at the range of 5.25%-5.50% during its two-day interest rate meeting on April 30 and May 1, 2024. It also decided to continue reducing the scale of assets but will slow down the pace of reduction.

In the post-meeting statement, Powell mentioned: "Over the past year, our contractionary monetary policy has exerted certain downward pressure on economic activity and inflation, and the achievement of employment and inflation targets has been moving in a better direction. However, in recent months, there has been a lack of further progress in returning the inflation rate to our 2% target, and we remain highly vigilant about inflation risks."

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He indicated that recent indicators show that economic activity continues to expand at a robust pace. Although GDP growth slowed from 3.4% in the fourth quarter of last year to 1.6% in the first quarter, the private domestic final purchase power (excluding inventory investment, government spending, and net exports) was 3.1% in the first quarter, as strong as in the second half of 2023.

Despite high interest rates putting pressure on residential and equipment investment, consumer spending has remained strong in the past few quarters. The job market remains relatively tight, but the supply and demand situation has become more balanced. The average number of new jobs added in the first quarter was 276,000, and the unemployment rate remains at a relatively low level of 3.8%. Over the past year, the growth of nominal wages has moderated, and the gap between positions and the workforce has narrowed, but labor demand still exceeds the supply of available labor.

Over the past year, U.S. inflation has significantly decreased but remains higher than the Federal Reserve's longer-term target of 2%. In the 12 months ending in March, the total PCE price index rose by 2.7%, and the core PCE price index, excluding food and energy categories, increased by 2.8%. The inflation data for this year have been higher than expected.

Powell reiterated that it is not appropriate to lower the target range of the federal funds rate until he has greater confidence in the inflation moving towards a sustainable 2% target. The economic data this year have not strengthened his confidence, especially since the inflation rate remains higher than expected, so it may take longer than anticipated to boost confidence.

Regarding the balance sheet, the committee decided to slow down the pace of reducing the balance sheet. Starting from June 1, the redemption cap for U.S. Treasury securities will be reduced from the current $60 billion per month to $25 billion per month. The committee will maintain the monthly cap for agency securities and use the funds exceeding that cap to invest in Treasury securities to ensure the committee's long-term goal of primarily holding Treasury securities. The aim is to ensure a smooth transition and reduce the likelihood of pressure on the money market.

Powell revealed that the next adjustment of the policy interest rate is unlikely to involve an increase, and he believes that the current policy is sufficient to bring inflation back to the 2% target level. However, at the same time, market expectations suggest that the Federal Reserve may delay the start of rate cuts until the second half of the year, or even before the U.S. general election in November.

Hong Kong Monetary Authority ResponseDue to the pegging of the Hong Kong dollar to the US dollar, following the Federal Reserve's announcement to maintain interest rates unchanged, the Hong Kong Monetary Authority responded by stating that Hong Kong's financial and monetary markets continue to operate smoothly, with the Hong Kong dollar exchange rate remaining stable. The Hong Kong dollar interbank interest rates may remain at a relatively high level for some time. The Monetary Authority will continue to closely monitor market changes to maintain currency and financial stability.

Response from the capital market

Despite the Federal Reserve's stance on maintaining its inflation target and clarifying that there will be no interest rate hike at the next FOMC meeting, the interpretation by the capital market remains somewhat ambiguous.

US Treasury bonds improve: Although Powell has not decided on a short-term rate cut, he also indicated that there will be no rate hike at the next FOMC meeting. The yield on the 10-year US Treasury note has fallen from a high of 4.7% at the end of April to 4.6%. It should be noted that bond yields move in the opposite direction to bond prices; the higher the yield, the lower the bond price, which means the price of the 10-year Treasury note has risen. However, it was observed that the price of the 10-year US Treasury note had surged at the time of the Fed's interest rate announcement, but later fell back, and is now slightly higher than before the announcement, with a significantly reduced increase.

US Dollar Index rises and then retreats: After the Fed's interest rate announcement, the US Dollar Index initially rose, but then fell back. Investors may have calmed down and are now focusing on the US employment data to be released on Friday to judge whether the labor market performance is sufficient to give the Fed the confidence to change its stance. The US dollar against the Japanese yen had risen above the 157 level (indicating dollar strength) before the FOMC, but then fell back to 155.86, with short-selling speculators possibly still testing whether Japan will intervene in the foreign exchange market.

Commodity prices: Determined by fundamentals. Gold prices rebounded from a four-week low to $2,320 per ounce, as more investors are inclined to have confidence in future rate cuts. On the other hand, oil prices fell, mainly due to the unexpected decline in US commercial oil inventories.

US stocks show individual developments, with the three major indices all showing good performance after the interest rate announcement, but ended weakly. The Dow Jones Industrial Average (DJI.US) closed up by 0.23%, the Nasdaq (IXIC.US) closed down by 0.33%, and the S&P 500 Index closed down by 0.34%. After the Fed's interest rate direction became clear, stock market investors turned their attention to corporate earnings. Amazon (AMZN.US), which reported earnings and focuses on AI development, closed up by 2.29%. However, previously strong chip stocks began to take profits, with Advanced Micro Devices (AMD.US), which reported earnings in line with expectations, falling by 8.91%. Its competitor Nvidia (NVDA.US) fell by 3.89%, and Starbucks (SBUX.US), which reported earnings below expectations, plummeted by 15.88%.

Hong Kong stocks and Chinese concept stocks surge: Capital may flow to emerging markets with lower valuations and greater growth potential, such as China. Hong Kong stocks rose sharply in the morning on May 2, 2024, with the Hang Seng Index closing up by 2.21% in the morning. AI concept stock SenseTime (00020.HK) continued its recent upward trend, surging by more than 33% in the early session. Tencent (00700.HK), Alibaba (09988.HK), and HKEX (00388.HK) all saw gains of over 3%, while Meituan (03690.HK) surged by 8%.

At the same time, the NASDAQ Financial China Index, which reflects the performance of Chinese concept stocks, has risen by 9.92% in the past three months, while the NASDAQ Index has only accumulated a gain of 0.05% over the same period.

It can be seen that in the second half of the interest rate hike cycle, as US stock valuations continue to face pressure and the US dollar lacks direction due to the unclear outlook of the interest rate cycle, emerging market assets with lower valuations and optimistic growth prospects, such as Hong Kong stocks and Chinese concept stocks, may offer better value for money.