The Federal Reserve has basically completed the "debt reduction" and began to raise interest rates. The "table reduction" may be a foregone conclusion in the future. On March 16 local time, the Federal Reserve held the second interest rate meeting in 2022. This meeting announced a new interest rate resolution, new economic expectations and dot matrix. Federal Reserve Chairman Powell held a press conference after the resolution. In this resolution, the Federal Reserve announced that it had ended its bond purchase plan in accordance with the guidelines of the January interest rate meeting, and raised the federal funds rate by 25 basis points to 0.25% - 0.5%, in line with market expectations. With prices continuing to rise and employment improving, this interest rate hike is the first time the Federal Reserve has raised the federal funds rate since December 2018. The statement of the interest rate meeting showed that the members passed the interest rate decision with a voting ratio of 8-1. Only St. Louis Fed President James Bullard disagreed. He proposed to raise interest rates by 50 basis points, which is the first time that someone has voted against it since September 2020; The dot matrix chart of the Federal Reserve shows that the median expectation of the federal funds rate by the Fed's decision-makers at the end of 2022 is 1.9% (0.9% in December), 2.8% (1.6% in the previous estimate) at the end of 2023, and 2.8% (2.1% in the previous estimate) at the end of 2024, which shows that there is still much room for interest rate increase based on the 25 basis points of this interest rate increase. The Federal Reserve expects to raise interest rates six times in the year, and then four quarterly interest rates in 2023, By the end of 2023, the interest rate will be increased 11 times, making the final interest rate reach 2.75-3%. At the same time, in terms of "table reduction", Powell said that Fed officials have made great progress in the discussion on table reduction, and will announce the start of table reduction as soon as may, which will be faster than the previous cycle. In terms of recent decisions of other central banks, the central banks of New Zealand and Canada have raised interest rates in advance at the end of February and early March, and the European Central Bank announced on March 10 that it would reduce its conventional asset purchase plan several months in advance. With the Fed's decision to raise interest rates, central banks in the UK, Japan, Brazil, Turkey and Indonesia are also expected to follow suit this week.
Under the fluctuation of geopolitical risk factors, the Fed expects the economic performance to slow down and inflation to accelerate, and the path of interest rate hike is still uncertain. According to the latest economic expectations, the Federal Reserve has significantly lowered the US GDP growth forecast by the end of 2022. The median GDP growth forecast from 2022 to 2024 is 2.8%, 2.2% and 2% respectively, and that in December last year was 4%, 2.2% and 2% respectively; The unemployment rate forecast remains unchanged at 3.5%; In terms of prices, the predicted PCE index is 4.3%, an increase of 1.7 percentage points compared with the 2.6% predicted at the end of December last year. The median core PCE inflation expectations from 2022 to 2024 are 4.1%, 2.6% and 2.3% respectively, and those in December last year are 2.7%, 2.3% and 2.1% respectively. This round of high inflation mainly comes from supply side factors. On the one hand, affected by the epidemic, American enterprises need to attract workers with high wages and benefits in the face of labor shortage, so as to increase their production costs; On the other hand, the conflict between Russia and Ukraine has pushed up international commodity prices and hit the global supply chain, putting pressure on the prices of gasoline and food in the United States. PPI in the United States rose 10% year-on-year in February, unchanged from the previous value, of which the most volatile areas are food and energy. In terms of employment, the United States added 678000 non-agricultural jobs in February, the largest increase since July last year, mainly driven by the leisure and hotel industry, which is one of the industries most seriously affected by the Omicron epidemic. The unemployment rate fell from 4% in January to 3.8%, which has not yet reached the level of 3.5% before the epidemic. High inflation has affected the actual purchasing power of consumers and reduced US consumer confidence. In March, the University of Michigan consumer confidence index fell to 59.7, the lowest level since September 2011. The increase of interest rates may further curb the expansion of Chinese consumption. The uncertainty of the US Federal Reserve's policy of raising interest rates and the uncertainty of the US Federal Reserve's policy of raising interest rates in the near future will certainly rule out the possibility of curbing inflation.
The interest rate increase was basically consistent with expectations, and the capital market reacted smoothly. In terms of the bond market, the market generally expects that the interest rate increase at this FOMC meeting has responded in advance. The yield of one-year, two-year, five-year and 10-year US bonds has risen since March, with an increase of more than 30 basis points. There has been no fluctuation after the interest rate increase resolution. In the stock market, the recent fluctuations of the three major U.S. stock indexes were mostly caused by the Russian Black Swan incident. Due to the support attitude of Fed officials on interest rate hike, the market has generally made sufficient preparations in advance for interest rate hike. After the interest rate meeting, the three major U.S. stock indexes did not fluctuate greatly. The Dow Jones industrial index closed up 1.55%, the NASDAQ index rose 3.77% and the S & P 500 index rose 2.24%. In emerging markets, with the intensification of the expectation of interest rate increase, capital began to gradually return to the United States from emerging markets. The MSCI Emerging market index continued to decline since mid February and fell to the lowest level since July 6, 2020 on March 15. After the boots landed, the MSCI Emerging Market Index did not fluctuate greatly. The decision to raise interest rates basically met market expectations, and the overall response of the capital market was stable after the boots landed. It is expected that the Federal Reserve will still maintain sufficient communication with the market in the follow-up operation.
Risk tip: geopolitical risk is higher than expected, and the U.S. economic recovery is lower than expected.
