Event: at 2 a.m. Beijing time on April 7, the Federal Reserve released the minutes of the FOMC meeting in March.
Core conclusions:
\u3000\u30001. The shrinkage of the table can be carried out as soon as may, with faster speed and stronger strength. The minutes showed that although no decision was made on the schedule reduction plan at this meeting, the participants believed that substantial progress had been made on the schedule reduction and relevant preparations had been made, which could be implemented after the conclusion of its upcoming meeting in May. In terms of scale reduction, participants think it is appropriate. If market conditions permit, the cap will be implemented in three months or a little longer. The table contraction took place two months after the first interest rate increase, which is much earlier than the previous round. Reaching the upper limit of table contraction can be completed as soon as three months, and the overall table contraction speed is also significantly faster than the previous round.
\u3000\u30002. There is strong uncertainty in the table reduction process, and the mode has changed slightly, so MBS may be sold actively. The minutes showed that it was generally agreed that the scale of the reduction was uncertain, and the committee must be ready to adjust any details of the reduction method according to economic and financial developments. The macro environment currently faced by the Federal Reserve is complex and abnormal. Maintaining flexibility in the table reduction process will help it better achieve its monetary policy objectives. In the last round of table reduction, the Fed adopted the method of automatic redemption at maturity, but the minutes show that if the table reduction goes smoothly, it can consider actively selling MBS (after balance sheet run off was under way, it will be appropriate to consider sales of agency MBS). The possible active sale of MBS is a big difference in this table reduction, because participants believe that under a series of reasonable interest rate scenarios, the prepayment of MBS principal may be lower than the monthly upper limit. If they want to keep their balance sheet dominated by treasury bonds, the active sale of MBS also partly reflects the willingness of the Federal Reserve to reduce the table as soon as possible.
\u3000\u30003. The interest rate increase will be carried out faster, and may increase interest rates for many times 50bp. The minutes showed that many participants believed that the current high inflation was far higher than the target set by the committee, and there were upward risks. The federal funds rate is much lower than the long-term interest rate (the federal funds rate well below participants' estimates of its long-run level), so the interest rate should be increased by 50bp this time. Due to the uncertainty caused by the situation in Russia and Ukraine, some participants believed that interest rates should be increased by 25bp. However, in future meetings, it is appropriate to raise the target interest rate by 50 BP once or more (one or more 50 basis point increases in the target range could be appropriate at future meetings), especially when the inflationary pressure is high or intensified.
\u3000\u30004. The minutes of this meeting are basically in line with market expectations. At present, the US inflation pressure is high, the employment market has reached the level of full employment, and the Federal Reserve will act faster. We expect that the FOMC meeting in May will raise interest rates by 50bp and the table contraction will be implemented immediately. In terms of the specific rhythm of shrinking the table, we basically maintain the original judgment. 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 US $602.7 billion, Accounting for 13.5% of the balance sheet. At present, the Federal Reserve holds about US $5.75 trillion of treasury bonds and US $2.69 trillion of MBS, which is almost twice that of the previous round. Therefore, the upper limit of US $60 billion of treasury bonds and US $35 billion of MBS per month set in the meeting minutes is in line with the experience of the previous round, but the fastest speed-up process is only three months, which is much shorter than the 12-month speed-up time of the previous round, indicating that the Federal Reserve will not only shrink its table in a faster way this time, The proportion of the reduced scale in the securities held is also expected to rise to a certain extent. 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.
\u3000\u30005. After the release of the minutes, US stocks fell in an all-round way, the interest rate of 10-year US bonds once exceeded 2.6%, the price of crude oil fell, and the indexes of gold and US dollar rose. We believe that with the Fed tightening faster, there is still pressure on US stocks to adjust. In terms of US bonds, due to the impact of the situation in Russia and Ukraine, US inflation continues to rise. The Fed's accelerated tightening will raise the real interest rate. In the short term, there is still upward pressure on 10-year US bonds, or they may remain high.
Risk tips
International tensions triggered higher than expected inflation, and the covid-19 epidemic situation deteriorated significantly.
