Event overview
At 3 a.m. Beijing time on January 27, the Federal Reserve announced the statement of the FOMC meeting in January. Relevant comments are as follows:
Main points
Taper's rhythm remains unchanged, and QE ends in March
Taper maintained its original rhythm and ended QE in early March. The Federal Reserve said at its interest rate meeting in January that it would continue to reduce its monthly pace of net asset purchases at the pace of a monthly reduction of $30 billion (20 billion U.S. Treasury bonds and 10 billion MBS) announced at the FOMC meeting in December last year. Starting from February, the committee will increase its holdings of US Treasury bonds by at least US $20 billion per month and US $10 billion MBS. QE will end in early March. The federal funds rate (0-0.25%), the reserve rate (0.15%) and the overnight reverse repo rate (0.05%) remained unchanged.
Powell said that he was partial to the eagle, and the rhythm of interest rate hike may exceed expectations
With high inflation and strong labor market, it is certain to raise interest rates in March. Compared with the last interest rate meeting, the Fed expressed inflation and employment more strongly this time. For inflation, it said that "the inflation rate is much higher than 2%" (last time, the inflation has exceeded 2% for some time). The latest data show that the US CPI and core CPI rose to 7% and 5.5% respectively in December 2021, both reaching new highs. As for employment, the Federal Reserve said that the "labor market is strong". The unemployment rate fell to 3.9% in December 2021, which is close to the historical low of 3.5% before the epidemic. In this context, the Federal Reserve said that "the Committee expects to raise the target range of the federal funds rate soon", and we expect that the first interest rate increase will be after the end of QE in March.
Powell said that he was partial to the eagle, and the rhythm of subsequent interest rate hikes may exceed expectations. At the follow-up press conference, Powell further responded to US inflation, employment and the rhythm of interest rate hikes. Powell said that the US economy has shown strong growth and resilience: in terms of employment, the labor market has made significant progress, and this improvement is universal; In terms of inflation, it has deteriorated since the FOMC meeting last December and is still far higher than the Fed's target. Although the supply chain problem will improve this year, it will be slower than expected. The situation in Eastern Europe is also a risk point. For the subsequent interest rate hike, Powell said that the current economic situation has formed an environment suitable for interest rate hike. Without threatening the labor market, there is a lot of room to raise interest rates, and it is not excluded from raising interest rates at every Federal Open Market Committee (FOMC) meeting.
The principle of table reduction is announced, and the table reduction process may be advanced
The principle of reducing the balance sheet was announced, and the reduction began after the interest rate increase: at the interest rate meeting, the Federal Reserve announced the principles for reducing the size of the Federal Reserve's balance sheet (hereinafter referred to as the principles). The principles said that the committee would determine the timing and pace of reducing the size of the Federal Reserve's balance sheet on the basis of achieving the goal of maximum employment and price stability. There are three main points in the principles. First, changing the target range of the federal funds rate is the main means to adjust its monetary policy position; Second, after raising the target range of the federal funds rate, it will start to reduce the size of the balance sheet; Third, it will shrink the table mainly by adjusting the securities held in the open market account (SOMA) of the reinvestment system, and promise to gradually reduce the securities holdings of the Federal Reserve in a predictable way over time.
The details of the scale reduction remain to be discussed, and the pace may be faster than that of the previous round: for the details of the scale reduction, Powell said that at present, the Fed has not made a decision on the timing and speed of reducing the balance sheet, and the Fed will hold at least one meeting to discuss the scale reduction after the first interest rate increase. However, Powell also mentioned that at present, the Fed has a larger balance sheet, shorter bond holding structure, stronger economy and higher inflation, which also means that the pace of table contraction may be faster than last time.
How does the policy differentiation between China and the United States show?
The Fed is biased towards eagle, US stocks may continue to be under pressure, and US bonds and the US dollar are stronger. In the first quarter, under the background of the increasing expectation of the Federal Reserve to raise interest rates and shrink the table, US stocks may continue to be under pressure. The three major US stock indexes fell rapidly after the Federal Reserve press conference. As of the close, the Dow fell 0.38%, the S & P 500 index fell 0.15%, and the NASDAQ rose 0.02%. The US debt and US dollar indexes continued to strengthen. The highest level of 10-year US debt exceeded 1.88%, and the high point of US dollar index exceeded 96.5, The follow-up trend needs to further observe the position of the Federal Reserve's interest rate meeting in March, as well as the changes in US inflation and fundamentals.
A shares may be dragged down and China's bonds may decline, and the RMB is facing devaluation pressure. Although China's monetary policy has significantly widened, it still takes time for the policy to take effect, and under the background of rising US debt and US stock adjustment, A-Shares may be difficult to perform in the first quarter; In the bond market, China's 10-year Treasury bond interest rate is expected to continue to decline and hover around 2.6% before the credit relief takes effect; The RMB exchange rate is facing some depreciation pressure, but at present, China's exports are still relatively stable and generally good, and the continuous surplus under the current account will weaken the degree of depreciation.
Risk tips
Economic activity has changed more than expected.
