At 2:00 am on July 29, Beijing time, the Fed will announce the interest rate decision, and then Fed Chairman Powell will hold a press conference at 02:30.
As worries about high inflation and the rapidly spreading Delta virus that may hinder global economic growth linger, global risk appetite continues to be sluggish, the United States Treasury bond yields plummeted. The 10-year U.S. Treasury bond yield fell to 1.239%, and the five-year Treasury bond yield fell to 0.697%, which to some extent reflects the market’s view of the Fed’s monetary policy.
The market still generally expects the Fed to stand still. What are the highlights of this interest rate meeting?
View point 1: When will the signal to reduce debt purchases be issued?
Powell testified before Congress that the US economic recovery has not yet reached the point where it can begin to shrink the scale of asset purchases. At the June meeting, the committee discussed the progress of the economy towards its goals since the adoption of the asset purchase guidelines in December last year.
Although there is still some distance from reaching the standard of “substantial further progress”, the Fed is expected to continue to make progress. The Fed will also continue to discuss the issue of asset purchases at its monetary policy meeting in July. However, Powell said at the hearing that it is difficult to describe exactly what constitutes “substantial further progress,” but he reiterated that the Fed will give tips before reducing QE (quantitative easing).
The international derivatives think tank pointed out that from the perspective of macro policies, the current international epidemic is regaining its momentum, the market is worried about economic recovery, there is still a gap in the superimposed job market, and the epidemic hinders recovery Powell maintained his dovish stance in two consecutive public speeches. It is expected that the Fed will maintain the interest rate resolution unchanged this week. The possibility of formal discussions on reducing the scale of bond purchases is relatively small. However, we still need to pay attention to the Fed’s policy of reducing bond purchases ( Taper’s attitude.
Thomas Costerg, senior American economist at Baida Wealth Management in Switzerland, believes that at the policy meeting held this week, Powell may reiterate the reduction of monthly debt purchases (currently ($120 billion per month) is still “too early.” Although the widespread spread of the delta variant virus may cause market anxiety, given the sharp rise in property prices in an extremely accommodating financial environment, the Fed is expected to maintain its plan to reduce quantitative easing.
Costerg said that the recent surge in inflation will still be regarded as a short-term phenomenon, mainly due to very special factors such as supply bottlenecks caused by the reopening of the economy. Once it is confirmed that the Delta variant virus will not hinder the continued steady recovery of the labor market, Powell may release more accurate signals at the Jackson Hole annual meeting of global central banks from August 27 to 28. Costerg predicts that the Federal Reserve will meet in December. Shanghai officially announced the reduction of its quantitative easing policy and will implement the relevant plan in January next year.
Invesco’s chief global market strategist Kristina Hooper also said, to reduce asset purchases The scale is still too early to say, and it is more likely to see the announcement of a reduction in the scale of asset purchases at the Jackson Hole meeting.
Aspect 2: How much does the market influence?
US Secretary of the Treasury Yellen recently sent a letter to congressional leaders asking Congress to take action to raise the federal government’s debt ceiling or suspend its effectiveness, otherwise the Treasury Department will take ” Unconventional measures” to prevent government debt defaults.
Costerg believes that given the opportunity for Congress to dispute the debt ceiling and the federal budget in September, it seems too early for the Fed to start reducing quantitative easing in September, but ahead of schedule The risk of starting the “reduction of balance sheet” still exists, and interest rates will not be raised until December 2023. Due to the high debt burden and political pressure to maintain easing policies, it is expected that the Fed’s subsequent interest rate hikes will remain slow.
Hooper pointed out that Powell is like walking a tightrope-preparing the market to reduce the scale of asset purchases, while ensuring that the Fed will be very patient when starting the normalization process. And make full consideration. The comments of any member of the Federal Open Market Committee (FOMC) may shake the market—especially as it approaches the beginning of normalization.
The international derivatives think tank predicts that the market is likely to remain high and volatile before the Fed’s interest rate decision is implemented. If the Fed’s interest rate decision shows a dovish attitude and does not specifically mention it The reduction of the Taper plan will continue the strong operation of U.S. stocks. If the Fed starts discussing the Taper plan, the market may adjust.