Event:
On January 25-26, the Federal Reserve held an open market committee (FOMC) monetary policy meeting, which showed that:
1) FOMC unanimously approved the decision to maintain the federal fund interest rate in the range of 0% - 0.25%; However, the statement shows that FOMC will start raising interest rates in the near future.
2) FOMC will continue to reduce asset purchase reduction (taper). Since February, FOMC will reduce the purchase of US $20 billion of US Treasury bonds and US $10 billion of institutional mortgage-backed securities (MBS) every month, and taper will end in March. The scale reduction will be started within a period of time after the interest rate increase.
3) the reduction will be carried out by means of automatic redemption of maturing assets, that is, the Federal Reserve will stop reinvesting after maturity. However, at this stage, FOMC has not reached any decision on the time or rhythm of shrinking the table.
Core view:
The meeting showed that the Fed's intention to control inflation was clear, and the rate hike in March was probably in line with market expectations. In terms of table contraction, compared with the previous round of table contraction, the scale of this round of table contraction will be larger, and the time interval between interest rate increase and table contraction will be shorter, but the impact of table contraction on market liquidity is expected to be limited.
In terms of US bonds, we believe that after the Federal Reserve's interest rate hike boots fall, US bond yields will be more affected by US economic fundamentals and inflation expectations. In terms of U.S. stocks, in the medium and long term, the interest rate increase does not necessarily lead to the decline of U.S. stocks, but if the interest rate increase causes damage to the fundamentals of the U.S. economy, it is highly likely to drag down U.S. stocks.
Powell hinted at raising interest rates in the near future
FOMC meeting statement shows that interest rates will be raised in the near future. Fed chairman Powell also pointed out that the Fed is ready to raise interest rates at the interest rate meeting on March 15-16. The opening remarks of "monetary policy will do everything possible to support the U.S. economy" were deleted from the statement at the meeting. The side reaction of this move is that the intention of the Fed's monetary policy shift is clear, and the interest rate hike in March is in line with the Fed's interest rate hike standard.
Abbreviation: motivation, rhythm and influence
The Fed's tightening is to combat inflation, effectively reduce the upside down pressure on the yield curve, and prepare for the next crisis through the normalization of monetary policy. Compared with the 2017 table contraction cycle, the rhythm of this round of table contraction may be faster, and the time interval between the opening of interest rate increase and table contraction may be shorter.
Looking back on the history of the Fed's interest rate hike, how did us bonds and stocks perform?
For the long-term US bond yield, monetary policy can only partially explain the trend of US bond yield. Based on the three factor analysis of US bond yields, we believe that after the Federal Reserve's interest rate hike boots are put into effect, US bond yields will be more affected by US economic fundamentals and inflation expectations.
In terms of U.S. stocks, after the interest rate hike in 2015 and the table contraction in 2017, the impact on U.S. stocks was limited, indicating that the fundamentals of the U.S. economy are getting better and hedging the pressure of monetary policy tightening. The interest rate hike cycle of the Federal Reserve in 1999 shows that the interest rate hike does not necessarily lead to the decline of US stocks, but if the interest rate hike causes damage to the fundamentals of the US economy, it is highly likely to drag down US stocks.
At this stage, the employment gap and output gap in the United States have not been closed. Under the background that the inflation rate fell in the second quarter, interest rates have been raised many times, which is not in line with the monetary policy goal of the Federal Reserve. Given that the main motivation for the opening of the interest rate hike cycle is to control inflation rather than economic overheating, the path of this interest rate hike may be different from usual.
Risk tip: inflation is higher than expected, causing the fed to tighten policy; The epidemic exceeded expectations, resulting in a rapid economic downturn.
