【MACRO Alert】Loosening Monetary Policy！Coordination and Gamesmanship between the Fed and Global Central Banks!

The Federal Reserve and other federal regulatory agencies plan to relax capital requirements for large banks, easing the capital burden on the banking industry, which is beneficial for enhancing lending capacity and financial market liquidity, supporting economic activities. However, there is still uncertainty in the market regarding the policy direction of the Federal Reserve, especially with the possibility of rate hikes not ruled out, as indicated by Bauman. While major central banks around the world have started cutting interest rates, several central banks are expected to cut rates before the end of June, reflecting the need for central banks of various countries to balance inflation risks while stimulating economic growth and combating downward pressure. The differing speeds and directions of adjustments in central bank policies will have profound effects on global financial markets and economic prospects.

Federal Reserve eases capital requirements for large banks

According to The Wall Street Journal, the Federal Reserve and other federal regulatory agencies plan to relax capital requirements for large banks, with the new plan potentially halving the previously proposed increase. This adjustment aims to ensure that large banks can withstand potential losses, which could bring significant benefits to the banking industry.

Previously, CEOs of major banks such as Jamie Dimon of JPMorgan Chase expressed strong opposition to the original proposal, citing concerns about its impact on profits and lending capacity, signaling a potential shift in the balance of power between regulatory agencies and banks. In July 2023, U.S. regulatory agencies proposed amendments to capital requirements for banks with assets exceeding $100 billion, involving around 30 large banks. This proposal was in response to recent banking crises and is related to Basel III agreements.

Regulatory agencies anticipate that the capital of these large banks needs to increase by 16% to 20% to enhance their ability to withstand risks. However, the banking industry believes their capital levels are already sufficient and have passed the Federal Reserve's stress tests, thus opposing further capital increases and threatening legal action. Following widespread criticism, regulatory agencies are considering significant modifications to the proposal.

The Fed Hawks issue stern warning: Rate Hike!

Warnings from Federal Reserve officials have caught the market's attention. Michelle Bowman, speaking at the Bankers Association Annual Meeting, indicated that despite the current seeming restrictive monetary policy, the possibility of a rate hike cannot be ruled out, especially if inflation remains high. She noted that supply chain issues remain unresolved and that inflation is expected to stay elevated for some time. At the same time, she emphasized the strength of the job market, with unemployment below 4%, and stated that data would continue to be monitored to assess policy stance.

Currently, the market indicates a probability of around 30% for a rate cut by the Fed this summer, with a probability of over 60% for a cut of 25 basis points or more by September. This week, several Fed officials, including Powell, Bostic, Waller, as well as regional Fed presidents Williams and Bostic, will deliver speeches intensively to provide the latest guidance on monetary policy direction to the market.

Signs of rate cuts by central banks around the world have emerged

Despite the Fed's delayed action, some central banks have begun cutting rates. Nomura's report indicates that the global rate cut cycle has begun, with over a dozen major central banks already cutting rates. Although some central banks were initially hesitant, considering their respective economic outlooks, more and more central banks are choosing to decouple from the Fed and cut rates ahead of time.

The European Central Bank is expected to cut rates first in June this year and conduct four 25 basis point rate cuts throughout the year, bringing the year-end rate to 3%; while the Fed is expected to make its first rate cut in July, cut rates twice this year, with the year-end rate forecast at 4.88% in 2024.

As the global rate cut cycle accelerates, some central banks' preparedness for rate cuts is highlighted through comparisons of core CPI inflation, the Sahm Rule's recession risk indicator, and actual policy rates. The Bank of Canada, the Reserve Bank of New Zealand, and the South African Reserve Bank appear prepared for rate cuts, while Brazil and Mexico, due to relatively high real rates, are expected to have more room for rate cuts within the global rate cut trend.