On January 26 US Eastern time, the Federal Reserve Open Market Committee (FOMC) issued a statement after the interest rate meeting in January, announcing that it would maintain the federal funds rate in the range of 0-0.25%, but the interest rate increase would be implemented soon. In addition, the Fed will end quantitative easing in early March. After the meeting, the hawkish attitude of the Federal Reserve turned the decline of US stocks from rise to fall, the US dollar index strengthened slightly, the US bond yield rose sharply, and the short-term range was more significant. The two-year sharp rise exceeded 15bp to above 1.15%, and the 10-year rise was about 6BP to around 1.84%.
I. background: high inflation drives the fed to accelerate its shift
The Fed remains optimistic about the outlook for the US economy. Fed chairman Powell said that with the help of vaccination, economic restart and macro policies, the US economy has shown great strength and resilience under the disturbance of the current epidemic. Although high-frequency data show that recent economic activities such as travel and catering have been affected by the epidemic, with the rapid decline in the number of confirmed cases in the future, the US economy will stabilize rapidly and accelerate recovery.
In terms of employment, the Fed believes that significant progress has been made. In the past six months, the average monthly non farm employment in the United States increased by 508000, the unemployment rate fell by 2 percentage points to 3.9% in the first half of the year, and low-income and ethnic minority groups improved significantly. It is worth noting that although the labor participation rate in the United States is still significantly lower than the pre epidemic level, the unemployment rate has been lower than the long-term unemployment rate estimated by the Federal Reserve (4%), which provides a basis for the Federal Reserve to accelerate normalization.
In terms of inflation, the Federal Reserve said that high inflation was mainly due to the mismatch between supply and demand caused by the epidemic, and has evolved into "general inflation". High inflation is the main reason for the Fed's accelerated shift in monetary policy. In 2021, CPI inflation in the United States reached 7%, a new high in nearly 40 years. Last year, the Fed continued to misjudge inflation and was forced to significantly raise its inflation forecast three times. After the meeting, Powell further stressed that inflation worsened further after the interest rate meeting in December, which became a threat to the continued repair of the US economy, "our policies must be dealt with".
