Xinhua News Agency, Washington, November 3, Hot Q&A: The Federal Reserve Announces Reduction in Bond Purchase
The US Federal Reserve announced on the 3rd that it will start to reduce the scale of asset purchases from later this month. This shows that the Fed will begin to gradually withdraw from the quantitative easing policy initiated since the outbreak of the new crown epidemic. As the world‘s most important central bank, the Fed’s monetary policy shift will inevitably have an important impact on international capital flows and financial market asset prices, and its spillover effects cannot be ignored.
Why the Fed should reduce the scale of debt purchases
In response to the impact of the new crown epidemic on the US economy and financial markets, the Fed lowered the target range of the federal funds rate to an ultra-low level of zero to 0.25% at the beginning of last year, and launched a quantitative easing policy to inject a large amount of liquidity into the market. Since the middle of last year, the Fed has been increasing its bond holdings at a rate of approximately US$80 billion in U.S. Treasury bonds and US$40 billion in institutional mortgage-backed securities every month to depress long-term interest rates and stimulate economic recovery.
The Fed has now decided to start reducing its monthly bond purchases. On the one hand, the U.S. economy has met the prerequisites set by the Fed for reducing bond purchases, namely, “further substantive progress” has been made in achieving full employment and 2% inflation targets. On the other hand, the side effects of the quantitative easing policy have become increasingly apparent. The US real estate and securities markets have shown signs of asset price inflation, which may affect the stability of the financial market. At the same time, facing the pressure and doubts of high inflation in the United States, the Fed needs to respond to concerns and consider ending its quantitative easing policy as soon as possible.
According to the Federal Reserve’s plan to reduce debt purchases announced on the 3rd, the Federal Reserve will reduce its asset purchases by US$15 billion from month to month starting later this month, including US$10 billion in U.S. Treasury bonds and US$5 billion in institutional mortgage-backed securities. But the Fed also stated that if the U.S. economic outlook changes, the Fed is also ready to adjust the rate of monthly asset purchases, that is, the Fed will also adjust the process of reducing debt purchases according to the situation.
Strictly speaking, the Fed’s reduction of bond purchases does not mean tightening of monetary policy. Desmond Rahman, an economist at the American Enterprise Institute, told Xinhua News Agency that even if it starts to reduce debt purchases, the Fed will still purchase a large number of bonds every month, and will not end its bond purchases until the middle of next year. Expanding. At the same time, the Federal Reserve still maintains the federal funds rate close to zero, which means that the Federal Reserve’s monetary policy stance has only changed from “very, very loose” to “very loose”.
When will the Fed start raising interest rates
After the Fed begins to reduce debt purchases, the market will focus on the next step of the Fed’s policy focus on when to start raising interest rates. Fed Chairman Powell emphasized at a press conference on the 3rd that the Fed’s start to reduce debt purchases does not mean any change in interest rate policy. The Fed has set stricter preconditions for initiating interest rate hikes. At present, the U.S. economy is still relatively close to achieving the goal of full employment. Far, now is not the time to raise interest rates.
Rahman pointed out that the Fed is unlikely to raise interest rates before June next year. Diana Swank, chief economist at Grant Thornton, said that Powell acknowledged that the US economy may achieve full employment next year, which means that the Fed may start raising interest rates in the second half of next year.
Fed officials are far from agreeing on when to raise interest rates. The Fed’s quarterly economic forecast released in September showed that nine Fed officials predicted at least one rate hike before the end of 2022, and another nine Fed officials supported the maintenance of ultra-low interest rates close to zero until 2023.
In view of the high inflationary pressures in the United States, Goldman Sachs economists recently announced that they would advance their forecast of the Fed’s first interest rate hike after the epidemic by one year to July 2022. At the same time, it is expected that the Fed will raise interest rates again in November 2022. The interest rate will be raised twice a year.
Wells Fargo Securities Chief Economist Jay Bryson believes that the current financial market’s expectations for the Fed’s interest rate hike are too aggressive. He predicts that the U.S. economy will not return to the full employment level before the outbreak of the epidemic until the end of 2022. The Fed will have to wait until the end of 2022. The interest rate hike cycle will not start until 2023.
Geometry impact on the world economy
After the official announcement of the Federal Reserve’s reduction in bond purchases, the yields of U.S. Treasury bonds and the exchange rate of the U.S. dollar did not change much. The three major stock indexes of the New York stock market rose slightly, and the performance of the global financial market was relatively stable.
The International Finance Association believes that financial markets have digested the Fed’s reduction in debt purchases in advance, and emerging markets’ ability to respond to global shocks has increased. The International Monetary Fund (IMF) recently completed a new round of special drawing rights allocations for emerging markets and Developing countries have replenished their foreign exchange reserves, so it is unlikely that the financial market will recur in the “debt reduction panic” situation.
Tobias Adrian, Director of the IMF’s Monetary and Capital Markets Department, pointed out that the “debt reduction panic” that occurred in 2013 caused a sharp rise in interest rates and a widening of credit spreads in a short period of time, which is very detrimental to emerging markets. Therefore, the Federal Reserve It is extremely important to improve policy communication and determine an appropriate pace of reducing debt purchases.
Adrian said that in order to stabilize inflation expectations, some central banks in emerging economies have already started raising interest rates. In the future, they should pay more attention to the trade-offs in promoting economic recovery, curbing inflation, and maintaining financial stability. He warned that the Fed’s sudden shift to raising interest rates may lead to drastic changes in the global financing environment. Some emerging markets may face the risk of reversal of capital flows. Countries with debt sustainability issues will face greater pressure and more debt restructuring may occur in the future. .
Adrian believes that the Fed’s reduction in debt purchases will not have a significant impact on China’s cross-border capital flows, because compared with other emerging markets, China has a clear advantage in attracting international capital inflows, and international investors are investing heavily in Chinese yuan issued Denominated stocks and bonds.