Historically, the Federal Reserve was a subsidiary of the Ministry of finance. Later, it became an independent department to manage interest rates. Monetary policy changed from being based on Taylor rules to anchoring the dual objectives of "employment and inflation", mainly managing short-term interest rates. The long-term interest rate is dominated by fundamentals, inflation expectations, risk premium (three factor model) and supply and demand. The upside down shape of the US yield curve may indicate a recession in the future. A model is established based on the slope of the curve. Assuming that the slope of the curve slows down, the probability of economic recession increases. In the past 50 years, when the probability of recession exceeds 80%, the U.S. economy has fallen into recession. Summing up the law of six rounds of interest rate hikes in history, it is not ruled out that after the Federal Reserve raised interest rates for a long time and many times, the U.S. economy fell seriously and the policy had to turn to easing.
The Fed's new monetary policy framework (employment first, inflation second) and the downward movement of the US inflation center in the past few decades have led to the Fed's slow response to inflation this time. Sustained high inflation makes it possible to raise interest rates at an "epic" rate. Interest rate futures show that the market expects to increase interest rates by 9 25bp in 2022. By the end of the year, the target interest rate of federal funds will reach the range of [2.5%, 2.75%]. From May, there is a high probability of reducing 60 billion treasury bonds and 35 billion MBS per month. When to stop depends on the demand for bank reserves. Reducing the balance sheet can alleviate the inverted shape of the US bond yield curve.
The United States has a sound interest rate system and tools to regulate the market through "quantity and price". The Federal Reserve provides loan facilities and deposit facilities to financial institutions, so that the overnight reverse repo (on RRP) interest rate and excess reserve ratio (iorb) form the lower and upper limits of the interest rate corridor, and the SRF supplements the upper limit. The way the Fed provides liquidity to the market: the first is to simply provide liquidity support; The second is QE, which is divided into financial QE (such as purchasing MBS and treasury bonds) and financial QE. Monetary policy alone is not enough to deal with the crisis. The monetary policy (mp3) supported by MMT theory and fiscal cooperation has effectively helped the United States deal with the epidemic crisis, and improved the possible aggravation of social wealth caused by monetary policies 1 and 2 (MP1 and MP2) to a certain extent.
In the fiscal framework system of the United States, we need to focus on (1) the political positions of the two parties and the class interests they represent, (2) the way the bill is passed at the two sessions: budget adjustment procedures or lengthy discussions, (3) the debt ceiling and the fiscal budget. On this basis, we can understand why the 350 million budget bill chose the budget coordination procedure, why it was difficult to pass after being greatly reduced, and why the funds in the TGA account would be reduced, resulting in the increase of excess reserves of commercial banks and reverse repurchase in the money market. "Fed assets - reverse repurchase" can better measure the liquidity put into the market by the Fed. The release of TGA account funds will lead to the growth of bank excess reserves, which will bring benefits to stocks, bonds and commodities.
Risk factors: there are deviations due to different statistical caliber of data, and the background of fiscal and monetary behavior is complex. Due to the limited space, it can not be carried out and fully discussed
