After raising rates by 25 basis points, the Fed sent a more hawkish signal.
Federal Reserve Chairman Jerome Powell said in a March 21 speech to the National Association of Business Economists that if the Fed deems it will raise the federal funds rate at one or more meetings Above 25 basis points is more aggressive, and the Fed will do it. If it decides it needs to tighten monetary policy beyond the usual neutral standard, the Fed will do the same.
Global stock markets rallied after the Federal Reserve raised interest rates by a modest 25 basis points last week. The median forecast among Fed officials is for six more rate hikes of 25 basis points this year, according to the dot plot forecast. Powell said in a subsequent news conference that the start of the balance sheet reduction is expected to be announced at an upcoming meeting.
The Fed’s next meeting on interest rates will be held on May 3-4, which also means that the Fed may raise interest rates by 50 basis points in May and officially Announcing abbreviated form.
How far can such a hawkish Fed go?
The Fed’s “tightrope” technique
For the Fed to raise interest rates by 25 basis points last week, some comments from the market pointed out that this resolution statement Neither speech with Powell was hawkish enough. The research department of CICC believes that in the short term, the Fed has released a signal: it is necessary to fight inflation and avoid recession. In order to avoid recession, some inflation can be tolerated. If the problem of high inflation cannot be solved this year, inflation will be controlled by means of “overshoot” in the next year and the next. This is the Fed’s practice of surviving in the cracks and trading time for space. In the medium term, the Fed’s tolerance for inflation will increase the risk of “stagflation” in the economy. If the U.S. economy can’t handle as many as seven interest rate hikes and a faster “balance sheet shrinking”, a recession could also follow.
Powell responded to the market’s concerns in a speech on March 21, saying that in the recent period, short-term inflation expectations have certainly risen with inflation, But long-term expectations remain stable within historical ranges. The Russia-Ukraine conflict has added short-term upward pressure on energy, food and other commodity inflation at a time when inflation is already too high. In normal times, when employment and inflation are close to target, monetary policy takes into account short-lived inflation associated with commodity price shocks. However, the risk that a prolonged period of high inflation could push up longer-term expectations is rising, suggesting the committee needs to act quickly.
Invesco chief global market strategist Kristina Hooper commented that the Fed is worried about the consequences of the realization of the interest rate point chart, which will increase the risk of recession. But the Fed also hopes to curb inflation fears and reduce the need for such aggressive tightening by making a firmer commitment to a higher, faster rate path on the dot plot.
Can the economy achieve a “soft landing”?
The “hawks” camp in the Fed system is also expanding.
Two members of the FOMC have publicly supported more aggressive rate hikes. Fed Governor Waller said he would support a series of 50-basis-point rate hikes over the next few months, with sharp hikes on the “front end” of the tightening cycle to impact inflation more quickly. St. Louis Fed President Bullard said officials should raise the Fed’s overnight lending rate to above 3% this year to combat high inflation. Bullard was the only committee member to vote against a 25 basis point rate hike at last week’s meeting, where he favored raising the target range for the federal funds rate by 50 basis points to 0.50. % to 0.75%.
In addition, the number of “hawkish” officials in the Fed system is increasing. Richmond Fed President Barkin said he was “very open” to raising rates by 50 basis points if inflation accelerated or inflation expectations rose. Minneapolis Fed President Kashkari said he wants to raise the federal funds rate to 1.75-2% this year.
But at a time when the epidemic has not yet ended and the superimposed Russian-Ukrainian conflict has pushed up global commodity prices, such a radical path of interest rate hikes has also triggered market speculation that the U.S. economy will decline worry.
In his March 21 speech, Powell noted that the Fed forecasts a soft landing for the economy with lower inflation and stable unemployment.
Soft landings, or at least somewhat soft landings, are relatively common in U.S. monetary history, he said. In three episodes, 1965, 1984, and 1994, the Fed significantly raised the federal funds rate in response to perceived overheating without triggering a recession. In other cases, recessions occurred chronologically after the end of the tightening cycle, but the recession was clearly not caused by excessive tightening of monetary policy. “worthNote that today’s economy is very strong and can handle tight monetary policy well. “
Hooper believes yields on U.S. two-year and 10-year Treasury yields have narrowed sharply in recent months as the Fed has become more hawkish. If the rate inverts, it could indicate a recession is imminent and there will be variables on whether the Fed will continue to raise rates, as some FOMC members have called for.
Hooper expects U.S. core inflation The peak is imminent, as federal government spending decreases in 2022, the M2 money supply decreases, the inflation index itself will adjust itself, and high prices will reduce demand and help ease price pressures. Although it will become increasingly difficult, The Fed can achieve a soft landing for the economy.
Will the Fed live up to its words?
It’s easy to post aggressive bitmaps, and it’s easy to be tough in press conferences and speeches. But can the Fed really raise rates seven times in a year?
It is worth noting that predictions from bitmaps may not be accurate. For example, the dot plot released at the Fed’s December 2018 meeting on interest rates suggested two rate hikes in 2019, but in fact, the Fed cut rates three times in 2019; in March last year, most Fed officials expected no rate hikes by the end of 2023. will raise interest rates.
“Old Debt King” Bill Gross (Bill Gross) warned that if the Fed follows through this year’s plan to raise interest rates by 25 basis points at each meeting, it will It will hit the real estate market hard and “destroy” the economy. “(Central bank) interest rates cannot go above 2.5% to 3%, otherwise it will damage the economy again,” Gross told the Financial Times last week. “We’ve just gotten used to low interest rates, and any increase will destroy the real estate market.”
Hooper also believes that raising interest rates as predicted by the dot plot will increase the number of economic cycles ending. The risk is very difficult to operate in practice, and the Fed will not take such radical measures in fact.
Invesco Asia-Pacific (excluding Japan) global market strategist Zhao Yaoting also said that the Fed was only verbally tough. Responding to a news question last week, he said the Fed was “walking a tightrope” and it was critical whether its words would translate into actions. Because in the case of high inflation, the policy rate does need to be raised, but if it is tightened too quickly, removing liquidity from the market, potentially ending the economic (business) cycle, leading to a recession. At present, the performance of the Fed is not bad, but it is indeed more hawkish in its words, and it is still dovish in actual actions. This is done to curb inflation while avoiding damage to economic growth.