FOMC background
On March 17, 2022, the FOMC meeting of the Federal Reserve was held. Before the meeting, the global market was volatile. Under the background of high inflation and geopolitical conflict, the meeting attracted particular attention from the market.
Main contents of FOMC decision in March
The interest rate increase of 25bps was announced as scheduled, which is the first interest rate increase since 2018, which is completely consistent with market expectations. James Brad was the only one who opposed the meeting because he proposed to raise interest rates by 50bps (considering his previous hawkish remark that "I'd like to raise interest rates by 100bps before July 1", so his opposition was fully expected.
At the subsequent FOMC meeting, the table reduction will be carried out (possibly as soon as may). The scope of the reduction includes US Treasury bonds, institutional bonds and MBS. In the question and answer session, Powell said that significant progress had been made in the discussion on the reduction of the table, and the specific time point had not been announced. As soon as may, the overall reduction framework is similar to that of the last time, and it is expected to still focus on the passive reduction of the table. However, Powell made it clear that the speed of the reduction of the table this time will be faster than that of the last time. The specific details of the reduction are expected to be disclosed in the minutes of the meeting next month.
Significantly lowered US economic growth expectations. In 2022, the real GDP growth rate of the United States will be reduced to 2.8% from 4% in December 2021. The real GDP growth rate in 2023 is expected to remain unchanged at 2.2%. In line with that, 9 of the 16 participants believed that the downside risk of GDP was greater. Correspondingly, at the December 2021 meeting, only 4 of the 18 participants believed that the downside risk of GDP was greater.
Significantly raise US inflation expectations. The core inflation expectation of PCE in 2022 increased from 2.6% in December 2021 to 4.3%, and from 2.3% to 2.7% in 2023. In the question and answer session, Fed chairman Powell stressed that considering the impact of oil and natural gas prices and the longer duration of the impact on the supply chain than expected, the Fed believes that inflation is likely to remain high in 2022.
The forecast for the US unemployment rate has not been adjusted, but concerns have increased. Participants maintained the unemployment rate of 3.5% in 2022 and 2023, but 8 of the 16 participants believed that the risk of unemployment rate increased, while only 3 of the 18 participants believed that the risk of unemployment rate increased at the meeting in December last year.
Interest rates are expected to rise sharply. Its median interest rate expectation for 2022 has increased from 0.9% in December 2021 to 1.9%, which means that in addition to this interest rate increase, there may be six interest rate increases in the year, which is basically the same as the seven interest rate increases expected by the market in the whole year. The expectation for 2023 and 2024 has increased from 1.6% and 2.1% in December to 2.8% respectively. This means that the pressure to raise interest rates is mainly concentrated in 2022. The implied rate increase in 2023 is only 90bps, but there is no rate increase in 2024. The Federal Reserve even slightly reduced the long-term interest rate from 2.5% predicted in December to 2.4%.
