Main points:
Event: at 2 a.m. Beijing time on March 17, the Federal Reserve issued a statement on the FOMC meeting in March 2022, announcing an interest rate increase of 25bp, and released the latest economic forecast and dot matrix.
The rate increase was in line with market expectations, and US stocks fell first and then rose.
\u3000\u30001. The Fed raised interest rates by 25bp at this meeting and will begin to shrink its table at the next interest rate meeting, which is basically in line with market expectations. The statement acknowledged that the current US inflation level remains high, and believed that the impact of the Russian Ukrainian conflict on the US economy is highly uncertain, which may cause additional inflationary pressure.
On the rhythm of interest rate increase and table contraction: the Fed raised interest rates by 25bp this time, and expected that the continuous increase of the target range of interest rates would be appropriate. It would implement table contraction at the upcoming meeting, which basically met the market expectations. We believe that the Federal Reserve may continue to raise interest rates by 25bp in May and officially begin to implement the table contraction. In terms of US economic performance, the Federal Reserve believes that the current economy is relatively prosperous and employment is strong. He believes that the high level of inflation is due to the epidemic, rising energy prices and broader supply-demand imbalance. Compared with the last time, the description of the job market has changed from robust to strong. At the same time, it is acknowledged that the inflation level remains high. The impact of rising energy prices on inflation is mentioned for the first time, and the words such as the financial environment is still loose are deleted.
On the issue of the conflict between Russia and Ukraine, the Federal Reserve believes that the conflict may have a more serious impact, which may bring additional upward pressure on inflation in the short term and have a certain negative impact on economic activities, but on the whole, the impact on the US economy is still uncertain. 2. Lower the economic growth forecast and significantly raise the inflation forecast. The dot matrix shows that it is expected to raise interest rates six times in 2022.
In terms of economic forecast, compared with December last year, the Federal Reserve lowered its GDP growth forecast for 2022 from 4% to 2.8%. It will remain unchanged at 2.2% in 2023. The unemployment rate is forecast to remain at 3.5%. The inflation level is expected to rise significantly, including PCE to 4.3% from 2.6% in December and core PCE to 4.1% from 2.7%.
In terms of dot matrix chart, Fed officials expect to raise interest rates six times in 2022, three times in 2023, zero times in 2024 and a total of 10 times. The dot matrix chart in December last year showed that interest rates were increased three times, three times and two times in 2022, 2023 and 2024 respectively, and the overall rate increase increased.
\u3000\u30003. The interest rate hike is basically in line with market expectations, and the statement and economic forecast are more in line with the reality of the U.S. economy. Although the dot matrix chart implies more hawks, U.S. stocks fell first and then rose.
1) from the statement, the Federal Reserve believes that the current US labor market has reached full employment, but the current US inflation level is more severe due to the rise of energy prices and the gap between supply and demand, which is more consistent with the non-agricultural and inflation data in February. The statement deleted the epidemic risk analysis and added the analysis of the conflict between Russia and Ukraine, indicating that the Fed is worried that the risk of geopolitical conflict may lead to the rise of energy prices, making it difficult to control US inflation and increasing relevant economic risks. Therefore, the Fed said it will continue to raise interest rates. This is basically consistent with Powell's previous relevant speeches and is in line with market expectations.
2) the economic forecast lowered the economic growth rate in 2022, and the University of Michigan consumer confidence index hit a low of 59.7 in February, which confirms that the U.S. economic growth may be slowing down. The sharp rise in inflation is also more in line with the reality. Judging from the CPI data in February, due to the conflict between Russia and Ukraine, the U.S. inflation level may not usher in an inflection point in the short term, and the inflation rate of the United States will continue to rise (refer to the report "the most" inflationary moment has not come - Comments on the CPI data of the United States in February ").
3) the dot matrix chart shows that the interest rate may be increased six times in 2002. Compared with the three times in the dot matrix chart in December, the position of Fed officials on interest rate increase is more "hawkish", which implies more possibility of interest rate increase, indicating that the current high inflation level forces the fed to adopt more tightening policies. Considering the possible decline of the US economic growth prospect, we believe that the remaining real interest rate hikes in 2022 may not reach 6 times.
4) at the press conference after the interest rate resolution, Powell said that the current US economy will remain strong and there is no recession risk for the time being. Affected by this, the market reacted positively. U.S. stocks turned up from decline. At the close, the Dow Jones index rose 1.55%, the NASDAQ index rose 3.77% and the S & P 500 index rose 2.24%. The 10-year US bond yield and the US dollar index rose and fell.
The pace of subsequent interest rate increase and table contraction may be fast before and slow after, and they are more flexible.
The current round of interest rate increase by the Federal Reserve is 25bp, which is relatively mild. We believe that the United States has achieved full employment and the inflation situation is relatively severe. The Federal Reserve may raise interest rates continuously at its meetings in May and June to control inflation. Throughout the year, the rate of interest rate increase is likely to be fast before and slow after, and shows a certain flexibility. In terms of table contraction, we believe that this round of table contraction will be faster than the previous round, and may not take the initiative to sell. Considering the great impact of table shrinkage on liquidity, the rhythm will also maintain greater flexibility. The specific details of the reduction will be announced in the minutes of the meeting on April 7.
\u3000\u30001. In terms of interest rate hike, although the Fed's interest rate hike this time is relatively mild, only 25bp, but due to the current severe inflation situation, we think it is possible to continue to raise interest rates at the meetings in May and June. The specific rate of interest rate hike will be determined according to the inflation situation, and the pace of interest rate hike throughout the year is probably faster than later. According to the statement, the US economy has basically achieved full employment, and the Fed's monetary policy at this time is mainly affected by China's inflation level. Affected by the rapid growth of the US economy and the continuous rise in energy and food prices caused by geographical conflicts, US inflation is still rising, and the inflection point has not yet come in the short term. Therefore, the Fed may choose to raise interest rates continuously in the interest rate meeting in May and June, and even does not rule out the small probability of a one-time interest rate increase of 50bp due to the continued high inflation. However, with the gradual easing of the impact of the conflict between Russia and Ukraine, the disappearance of the low base effect and the inhibitory effect of interest rate hike on the demand side, the US inflation rate will probably fall by a large margin in the second half of the year. Under the effect of multiple interest rate hikes and economic cycles, the US economic growth may slow down to a certain extent. At that time, the Federal Reserve will also slow down its interest rate hike rhythm. The overall interest rate hike rhythm of the whole year shows a trend of fast before slow. The current macroeconomic situation is more complex and uncertain. The Fed's monetary policy operation will more reflect the characteristics of "discretionary choice", pay more attention to the current relevant economic data, and have high flexibility. Overall, due to the current rising inflation level and high uncertainty, we raised the number of interest rate hikes by the Federal Reserve to 4-5 times in the whole year. The pace is fast before and slow after. The frequency and range of interest rate hikes will remain highly flexible.
2. In terms of table shrinkage, we expect that this round of table shrinkage will be faster than the previous round of table shrinkage, and we will not take the initiative to sell. At the same time, due to the great impact of table shrinkage on liquidity, a certain degree of flexibility should be maintained. The Fed did not make further clarification on the details of the reduction. According to Powell's statement at the meeting, the reduction will be implemented immediately after the meeting in May. According to the recent statements of relevant officials of the Federal Reserve and the criteria for reducing the balance sheet at the FOMC meeting in January, the current scale of the Federal Reserve's balance sheet is almost twice that of the last round of table contraction, and the approximate rate of this table contraction will be faster than that of the last time. From the specific measures taken to shrink the table, it is unlikely to take the initiative to sell relevant securities. The probability is to adopt the method of setting the upper limit of due redemption in the last round to make the process of shrinking the table more predictable. At the same time, considering that the table reduction has a great impact on the overall liquidity level, the flexibility should be maintained and the table reduction method should be adjusted according to the specific situation.
Referring to the experience of the previous round of table reduction, at the beginning of the table reduction cycle (October 2017 September 2019), the Federal Reserve held us $2.47 trillion of treasury bonds and US $1.77 trillion of MBS, and its table reduction rate gradually accelerated from the initial US $6 billion of treasury bonds and US $4 billion of MBS per month (about 0.235% of the securities held) to the high point of US $30 billion of treasury bonds and US $20 billion of MBS per month (about 1.2% of the securities held), A total decrease of $602.7 billion, accounting for 13.5% of the balance sheet size. This time, the Fed will shrink the table in a faster way, so the proportion of the reduced table in the securities held will also rise to a certain extent. Assuming that the initial scale of table reduction accounts for 0.35% of securities held, and the Federal Reserve holds about US $5.75 trillion of treasury bonds and US $2.69 trillion of MBS, the initial rate of table reduction may be US $20 billion of treasury bonds and US $10 billion of MBS per month. After the subsequent acceleration, assuming the same speed as the previous round, the peak may be $60 billion of treasury bonds and $30 billion of MBS per month. However, since the Federal Reserve did not reach the scale initially set in the last round of table contraction cycle, the final scale of this round of table contraction will still be determined according to the specific performance of the US economy. The specific details of the reduction will be announced in the minutes of the meeting released by the Federal Reserve on April 7.
Taking history as a mirror, what is the performance of various assets after the Fed raised interest rates for the first time?
After reviewing various assets after the Fed's first interest rate hike in the past, we can find that there is a certain adjustment pressure for US stocks, but the adjustment range is relatively small, and the adjustment range of NASDAQ index is larger than that of Dow Jones index. Crude oil prices will generally continue to rise for a period of time after the first interest rate increase by the Federal Reserve, mainly because the US economy is relatively prosperous when the interest rate is increased, and most of the global economy is in the stage of expansion, thus driving the rise of oil demand. As one of the most important precious metals in the world, gold will fall to a certain extent after the Federal Reserve raises interest rates for the first time, but the gold price is still relatively strong due to inflation preservation and the needs of industrial production. The dollar index showed a short-term downward trend after the first interest rate increase.
\u3000\u30001. U.S. stocks: after the Federal Reserve raises interest rates for the first time, U.S. stocks will adjust to some extent, but the adjustment range is relatively small. Among them, the adjustment range of NASDAQ index is more intense than that of Dow Jones index, and the adjustment time is longer. We have studied the process of four interest rate hikes since the 1990s and found that after the first interest rate hike, US stocks will adjust to a certain extent, but they will return to the rising trend after a certain time. After the interest rate hike in February 1994, US stocks adjusted for 6-12 months. After raising interest rates for the first time in June 1999, the Dow Jones index was adjusted for less than 5 months, and the NASDAQ index continued to maintain a rapid upward trend as a result of the Internet bubble. After the first interest rate hike in June 2004, the Dow Jones index and Nasdaq index adjusted for about six months, but the adjustment range was about 5%. After the first interest rate hike in December 2015, the adjustment ranges of Dow Jones index and Nasdaq index were about 5.5% and 9% respectively, which lasted less than three months. Therefore, the Fed's interest rate hike may have a certain disturbance for US stocks in the short term, but it will return to the fundamentals of corporate profits in the medium and long term. During the interest rate hike, the US economy is relatively prosperous, so it drives us stocks to recover their rising momentum quickly.
\u3000\u30002. U.S. debt: compared with U.S. stocks, the performance of U.S. debt is different in the four interest rate hikes in history. During the interest rate hikes in 1994 and 1999, the interest rates of 10-year and 2-year US bonds kept rising before and after the first interest rate hike, which showed that the rise of real interest rate and inflation level in the process of economic recovery led to the rise of bond interest rate. After the first interest rate hike in 2004 and 15 years, the interest rate of 10-year US bonds fell slightly in the short term, as did the two-year Treasury bonds, or the interest rate hike worsened the economic outlook due to the unstable foundation of economic growth, resulting in the short-term decline of US bond yield.
\u3000\u30003. Crude oil: as a commodity, the Fed's interest rate hike will have a certain negative impact on commodity demand. However, in history, every time the Federal Reserve raises interest rates for the first time, the US economy is relatively prosperous, and most of the global economy is in the period of expansion. Therefore, there is a strong demand for crude oil, driving the rise of crude oil prices. After the first interest rate hike, as the US economy is still continuing its previous recovery posture, it has a relatively strong support for crude oil prices. From the four interest rate hikes in the 1990s, after the first interest rate hike, crude oil prices continued to rise or remained high and volatile for most of the time. However, after the continuous interest rate hike, the decline in the momentum of the recovery of the US economy and the global economy will weaken the demand for commodities in the world's major economies, leading to the gradual decline of oil prices.
\u3000\u30004. Gold: after the first interest rate hike by the Federal Reserve, gold will fall in the short term, but the medium and long-term prices are more affected by inflation and economic fundamentals. As one of the most important precious metals in the world, gold not only has safe haven value, but also has considerable industrial value. Generally speaking, when the Federal Reserve starts to raise interest rates, it will push the US dollar index upward, and investors will choose the US dollar to avoid risk. As one of the hedging tools, gold will have some downward pressure in the short term. But at the same time, when the Fed raises interest rates, global inflation expectations are high. As a "hedge" asset, gold will be sought after to a certain extent, driving the rise of gold prices. The industrial demand for gold will also further increase during the economic boom, which will support the price of gold. In the medium and long term, gold prices are more affected by inflation and economic fundamentals. 5. US dollar: according to the impact of previous interest rate hikes on the US dollar, the US dollar index will be pushed up rapidly under the strong expectation of the market before the interest rate hike, which may be due to the risk aversion choice of the market, which drives global funds into the United States. However, after the first interest rate increase, due to the expected landing, the US dollar index will cool down in the short term and show signs of peaking and falling. However, the subsequent trend of the US dollar index still depends on the fundamentals of the US economy.
Risk tips
International tensions triggered higher than expected inflation, and the covid-19 epidemic situation deteriorated significantly
