Event:
Members of the Federal Reserve Monetary Policy Committee (FOMC) unanimously voted to raise interest rates by 50 basis points and shrink the table from June 1. In the initial stage, the maximum monthly reduction was $47.5 billion. Three months later, the maximum monthly reduction was raised to $95 billion. We still maintain our previous judgment that the Federal Reserve may raise interest rates to near 2.5% of neutral interest rates by the end of this year.
Key points of comments:
Raise interest rates by 50 basis points and shrink the balance sheet in June
The interest rate increase of 50 basis points was in line with expectations. In the initial stage, the maximum monthly reduction of US Treasury bonds is set to be US $30 billion. Three months later, the maximum monthly reduction will be raised to US $60 billion; In the initial stage, the maximum monthly reduction of institutional bonds and institutional MBS was set to be $17.5 billion. After three months, the monthly reduction limit was raised to $35 billion. An important statement added to the May statement mentioned that China's epidemic blockade may affect the supply chain, and the committee is concerned about the resulting inflation risk. At the press conference after the meeting, Powell said that the interest rate may be increased by 50 basis points in the next two meetings, and the end point of the interest rate increase will be set after it is added to the neutral interest rate.
The principle, method and rhythm of the Fed's table reduction
The form of this wheel is similar to that of the previous wheel, which is still passive. The Fed will continue its current reserve adequacy model, so the size of the final balance sheet will still be significantly larger than in the era of scarce reserves before the 2008 financial crisis. At present, it is conservatively estimated that the overall scale of scale reduction will be at least about US $4 trillion, and it is estimated that the scale reduction rate of US $95 billion per month will last about three years. The scale of this year's scale reduction is $522.5 billion, which is basically consistent with our previous expectations, equivalent to an additional interest rate increase. Compared with the previous cycle, this round of table shrinkage has faster rhythm and larger scale.
Structure of treasury bonds and MBS held by the Federal Reserve
The Federal Reserve mainly holds treasury bonds. The proportion of treasury bonds and MBS held by it is about 70% of treasury bonds and 30% of MBS. The term structure of treasury bonds held by the Federal Reserve is that Treasury bonds of less than one year account for about 20% and treasury bonds of more than one year account for 80%. Among them, the proportion of 1-5 years and more than 5 years is about 40%.
Risk tips
The epidemic repeatedly exceeded expectations, and geopolitical risks exceeded expectations
