The Fed seems to be signaling a change in monetary policy.
In recent days, Dallas Fed, Richmond Fed and Atlanta Fed Chairman have all stated that the epidemic crisis is fading, and this trend has laid the foundation for the Fed to adjust its easing policy. Philadelphia Federal Reserve Chairman Hacker also urged the Fed to start discussing when and how quickly to reduce the asset purchase plan, and to reduce the debt purchase plan “sooner rather than later.”
“Debt reduction” coming soon?
The minutes of the Federal Reserve’s meeting on interest rates in April this year mentioned for the first time the discussion on reducing quantitative easing (QE) and indicated the market survey’s approach to reducing debt purchases . Although the general direction of the minutes of the April meeting is still biased, the discussion on QE reduction has made the market generally believe that the Fed’s voice is not as expected.
First of all, the minutes of this meeting mentioned for the first time that “many participants suggested that if the economy continues to move towards the committee’s goals, then in the upcoming meetings It is appropriate to start discussing plans to adjust the speed of asset purchases at some point.” Secondly, the minutes mentioned that “according to the survey response, the Fed’s net asset purchases are expected to end in the three quarters after the first reduction in the size of purchases, and the target range of the federal funds rate will be raised for the first time in the three quarters after the cessation of asset purchases.” .
The chief analyst of CITIC Securities’ bonds clearly believes that no matter what the Fed officials’ stance is, the increasing scale of overnight reverse repurchases indicates that Taper is approaching.
Combined with the experience of the previous round of QE withdrawal, the Fed’s unemployment rate target, and St. Louis Fed Chairman Brad’s statement on the vaccination rate, he clearly believes that vaccine The vaccination rate of 75% or the unemployment rate of 5.4% may trigger the Fed to discuss the reduction of debt purchases. The specific signal may be at the interest rate meeting in June or July, the actual start of the reduction action or around the end of the year. If the volume of overnight reverse repurchase increases rapidly in the short term, then the possibility of the Fed moving ahead is not ruled out.
According to the overnight reverse repurchase data released by the New York Federal Reserve, since late April, the Fed’s overnight reverse repurchase agreement demand and transaction volume have increased significantly. On the day when the Federal Reserve announced the meeting minutes, the overnight reverse repurchase scale reached US$293.998 billion, far exceeding the peak level mentioned in the minutes. At the same time, it continued to maintain high growth on May 20 and 21, reaching 35 respectively.The levels of US$1.121 billion and US$369.46 billion have reached new highs in the past four years, indicating that the current US financial system is in a state of excess liquidity.
Obviously, in addition to the discussion on QE reduction, the minutes of the Fed’s April meeting mentioned the surge in excess reserves in the banking system, and the corresponding amount of overnight reverse repurchase at the same time The surge may be a key variable that affects the pace of reducing debt purchases.
The Fed’s dilemma
However, Atlanta Fed Chairman Bostic, Richmond Fed Chairman Barkin and Dallas Fed Chairman Kopron In a speech at the same event, he also pointed out that employment should be increased before being prepared to discuss “reducing the scale of debt purchases.”
According to the Fed’s statement in recent interest rate meetings, “prior to making substantial progress in achieving the committee’s maximum employment and price stability goals,” monetary policy will not Will change.
According to data released on May 12, U.S. inflation in April has improved year-on-year and month-on-month growth, performance has exceeded market expectations, and inflation has accelerated. Specifically, the U.S. April CPI recorded an annual rate of 4.2%, the previous value was 2.6%, and the expected 3.6%, the U.S. April CPI monthly rate was 0.8%, the previous value was 0.6%, and the expected 0.2%; the U.S. April PPI monthly rate was 0.6 %, the former value is 1%, the expected 0.3%, the US April PPI annual rate is 6.2%, the former value is 4.2%, the expected 5.9%,
the data released on May 20 show In the United States, the number of initial jobless claims for the week to May 15 reached 444,000. The previous value was 478,000. The expected number of jobless claims exceeded 450,000. The number of initial jobless claims in the United States exceeded market expectations. Driven by the restoration, the job market has improved marginally. Although the number of applicants for unemployment benefits gradually decreased at the beginning of the week, the current level is still a certain distance from the pre-epidemic level and the unemployment rate remains high. In the short term, the job market is still an important indicator considered by the Fed.
clearly pointed out that the current Fed’s monetary policy focuses on two goals, one is the price level, and the other is the employment situation. When the price level is soaring but the job market is weak , The Fed is in a dilemma. This can be found in the recent vacillating speeches of Fed officials.
UBS Wealth Management Investment Director’s Office believes thatThe Fed is still waiting for economic indicators such as labor to rebound to a sufficiently strong level, and plans to pave the way for tightening monetary policy. The agency estimates that the Fed will release a signal to reduce debt purchases in August of this year, and announce the news in December and implement the reduction in asset purchases next year; it is expected that the Fed will wait until 2023 to release the signal to raise interest rates until 2024. Tightening of monetary policy only began in the year.
UBS stated that the U.S. dollar will remain weak in the next three to six months due to the Fed’s patience to adjust monetary policy. However, when the Fed will become “hawkish” before the end of the year and the momentum of the global economy begins to slow, the strength of Asia-Pacific currencies will also be difficult to sustain. The currency market may present a new scene next year. It is expected that the US dollar will appreciate next year, while the yield of the US 2-year Treasury will also rise, and the market is also preparing for an interest rate hike cycle. Once the Fed’s policy stance begins to shift, next year’s Asian economic growth may slow by nearly 2 percentage points to 6.4%. At the same time, the US economic growth will only slow by 1 percentage point to 5.9%. Narrowing in disguise is in favor of the dollar.