In the early morning of April 7 Beijing time, the Federal Reserve released the minutes of its March meeting, which attracted much attention. On the same day, although both US stocks and bonds closed down, the market volatility caused by the announcement of the minutes of the meeting was limited. The meeting minutes are as hawkish as ever. The most important information in the minutes is to disclose the pace of table contraction in the second quarter. The maximum monthly reduction of US debt and MBS may reach US $60 billion and US $35 billion. At present, the market is highly concerned about the Fed's table contraction. Here we respond to two questions about the Fed's table contraction.
In the first and second quarters, the Federal Reserve is about to start this round of table contraction. It can be said that may will be the starting point of this round of table contraction. How to evaluate the scale reduction in the starting period?
Second, the Fed's table contraction will go through a period of time. Looking into the future, when will this round of fed table contraction stop, that is, how to judge the end point of this round of fed table contraction?
What is the progress of the Fed's schedule contraction during the starting period of this round? The intensity is significantly greater and the rhythm is significantly faster. According to the minutes of the meeting, most members believe that the monthly reduction ceiling of US debt and MBS may be US $60 billion and US $35 billion respectively. When the fed first started to shrink the table, the monthly reduction scale was not large, and then increased layer by layer. After a period of time, the monthly reduction reached the upper limit. We might as well call this period the starting point of the Fed's table contraction. If the table is reduced from May, the scale of each meeting will gradually increase. After two meetings (about three months), the monthly scale of US debt and MBS will be US $60 billion and US $35 billion respectively. The starting point of the last round of fed table contraction was October 2017, and then the scale of table contraction increased every quarter. One year later, in October 2018, the scale of US debt and MBS scale reduction reached US $30 billion and US $20 billion respectively. Compared with the previous round of table shrinkage and this round of table shrinkage, it is obvious that this round of table shrinkage has faster rhythm and greater range. After all, the monthly upper limit of this round of table contraction is almost twice that of the previous round, and the starting period of this round of table contraction is 1 / 4 of that of the previous round.
How to judge the rhythm of subsequent fed table contraction? The key to the termination of the Fed's table contraction depends on whether liquidity is tight. The Fed's withdrawal is not unconditional. Once the termination conditions are touched, the Fed's table contraction will stop, which is the end point of the Fed's table contraction. We believe that the end point of this round of fed table contraction will depend on whether there is a shortage of liquidity. There are two dimensions to judge whether there is a shortage of money liquidity. The dimension of liquidity "quantity" mainly depends on the usage of standing repo instrument (SRF). When financial institutions lack liquidity, they can obtain liquidity from the Federal Reserve through SRF. Therefore, once the use of SRF increases significantly, it means that there is a shortage of liquidity in the money market.
The dimension of liquidity "price" mainly depends on the repo rate or the effective federal funds rate (effr). Repo rate and effr are the capital interest rates traded in the market. When they rise, it means that the market liquidity is tightening. When the equivalent price gives a signal of tightening liquidity, we need to pay attention to whether the subsequent table contraction process of the Federal Reserve will turn to easing. For example, when the repo rate and effr break through the bank reserve interest rate, and even break through the upper limit of the federal funds interest rate range, it means that liquidity has been scarce to a certain extent, and the current round of table contraction may be terminated.
50bp interest rate increase may be realized in the second quarter. It should be noted that the current market expectation is still too hawkish.
The minutes of this meeting also mentioned the interest rate increase in the second quarter. Most participants believed that one or more 50bp interest rate increases would be appropriate in future meetings. This means that the Fed's topic has changed from "whether to raise interest rates by 50bp" to "how many times to raise interest rates by 50bp".
At present, the market expects the Federal Reserve to raise interest rates 10 times a year (calculated by 25bp each time). If each meeting raises interest rates, there will be three interest rate meetings, and the Fed will raise interest rates by 50bp. The expectation of 10 interest rate hikes is only an impulse response of the market. After the rapid interest rate hike leads to the decline of demand and inflation, the US bond interest rate is expected to be difficult to maintain its current high.
Risk tip: the Fed's interest rate hike is faster than expected; Inadequate understanding of the Fed's monetary policy; Geopolitical risks; The risk of runaway inflation; The development of the epidemic exceeded the expected risk.
