Matters:
On March 16, 2022 us time, the Fed announced the statement of the FOMC meeting in March, and fed chairman Powell was interviewed. After the announcement of the conference statement and economic forecast, the market sentiment was pessimistic; After Powell's speech, the market reacted positively. The S & P 500 index turned from decline to rise, with a daily increase of 2.2%, higher than the 1.2% increase before the announcement of the conference statement. In the past 10 years, US bond yields rose first and then fell, closing at 2.195%; The dollar index plunged from a high level to 98.4 from above 99 points.
Ping An View:
Monetary policy: announced to raise the federal funds rate by 25bp to the target range of 0.25-0.50%, in line with expectations. In line with the new federal funds rate range, several other policy interest rates have been raised at the same time. The committee is expected to start downsizing at a later meeting. We believe that the Federal Reserve will probably announce the scale reduction in May, or reduce assets by $100 billion a month.
Statement: 1) the statement on the impact of covid-19 epidemic has been deleted. 2) Further emphasize the inflationary pressure, especially the impact of "energy price", and believe that the current price pressure is "broader". 3) The geopolitical conflict between Russia and Ukraine brings additional inflationary pressure and may drag down economic activities.
Economic forecast: 1) economic growth, sharply reduce the real GDP growth rate in 2022 by 1.2 percentage points to 2.8%. 2) Employment, maintaining the unemployment rate forecast at 3.5% in 2022. 3) Inflation, significantly raising the year-on-year growth rate of PCE in 2022 by 1.7 percentage points to 4.3%; Slightly increase the PCE in 2023 by 0.4 percentage points year-on-year to 2.7%. Our benchmark estimates show that under the neutral scenario, the US CPI is expected to be 5.8% year-on-year in 2022 and the US PCE is expected to be 4.5% year-on-year. 4) According to the dot matrix, the median interest rate forecast in 2022 is in the range of 1.75-2% (i.e. the annual interest rate increase is considered to be 175bp), which is 100bp higher than the median in December 2021. The interest rate increase in 2022 shown in the dot matrix is basically in line with the expectations of the interest rate futures market. We believe that the Federal Reserve may raise interest rates by 100bp in the first half of this year (i.e. 50bp at a meeting in May or June), but the range of interest rate increase in the second half of this year is uncertain.
Powell's speech: most of the issues revolve around "inflation". Powell stressed that the Fed will take action aimed at price stability and that the Fed has sufficient tools to deal with inflation. As for whether the market is worried that raising interest rates will damage the US economy, Powell denied the risk of economic recession next year and stressed that the current US economy and job market are still strong, and appropriately reducing demand will help the job market to be more balanced.
The determined starting point and the unknown end point: raising interest rate by 25bp and starting the interest rate increase cycle belong to the "determined starting point". But looking back, the interpretation of US inflation, the Fed's policy choice and the US economic outlook are "unknown endpoints". In 2022, US inflation may show the characteristics of "fast before slow after", and the Federal Reserve may raise interest rates faster after this "small test". However, considering that it is difficult to assess the impact of geopolitical conflicts and there is still high uncertainty about the scale and pace of the reduction, the Fed may continue to "carefully verify" between guiding expectations and "walking and watching". Further looking forward to the trend of the financial market in the first half of the year: 1) the interest rate of 10-year US bonds may rise to 2.3-2.5% in the first half of the year. We still need to be vigilant against the risk of narrowing the term interest spread of US bonds and even upside down. 2) U.S. stocks may show resilience, and there is little probability of in-depth adjustment. 3) The dollar will get more support in the short term, and there may be a shock correction in the follow-up.
