Original title: The Fed’s interest rate hike is expected to have little effect on China’s overall monetary policy in advance
Pang Ming, PhD in Economics, Chief Economist and Chief Strategic Analyst, Huaxing Securities (Hong Kong)
After the Federal Open Market Committee meeting in June, the US Federal Reserve kept the benchmark interest rate unchanged at 0-0.25% as expected by the market, reiterating that “until labor market conditions reach a level consistent with the Committee’s assessment of full employment, inflation It has risen to 2% and is expected to moderately exceed 2% in a period of time.”
Behind the hawkish stance is the Fed’s increased confidence in economic recovery and increased tolerance for inflation. At this interest rate meeting, the Fed revised up its inflation expectations and economic growth expectations. It is expected that US GDP will grow by 7%, 3.3%, and 2.4% in 2021, 2022, and 2023, respectively, which are higher than the expected value in March. 0.5%, remain unchanged and increase by 0.2%. At the same time, the Fed significantly raised the year-on-year growth expectations of the personal consumption expenditure (PCE) price index for 2021 and the core PCE price index year-on-year growth expectations to 3.4% and 3.0%, 1 percentage point higher than the expected value in March this year. And 0.8 percentage points.
The interest rate meeting has begun to discuss reducing the scale of bond purchases. Powell did not specify the timetable and pace for reducing the scale of debt purchases, but he promised to carry out forward-looking guidance to the market to avoid overreaction by the market as much as possible, and said that the economy will still have growth potential next year, but the financial support for the economy next year The intensity will be weaker than this year.
We believe that the latest macroeconomic data in the United States shows that the improvement of its unemployment rate is slower than market expectations. In recent weeks, many Fed officials have suggested that they may lower the employment growth standard required by the economy to achieve maximum employment; The supply-demand gap has not yet been closed and the inflationary pressure has continued to rise. The rapid rise in housing prices and the strengthening of car prices have also promoted the upward trend in inflation. The low vaccination willingness of the vaccinated population may delay the progress of the United States‘ economic restart. The economy continues to recover strongly but its momentum has slowed down.
According to the New York Federal Reserve’s regular surveys of market participants, the current market expects that the Fed will reduce the size of asset purchases to zero within three quarters after the first start to reduce the size of asset purchases, and begin to raise the federal funds rate for the first time in the next three quarters. Target interval. We maintain our previous forecast:
First, the inflation level in the United States may continue to rise during the year, and the high point may appear in the third quarter to the fourth quarter of this year, and it is expected to fall back in the future. We expect the year-on-year growth of the CPI in 2021 and 2022 to be 3.8% and 2.1%, the PCE price index to grow 3.2% and 1.9%, and the core PCE price index to grow 2.9% and 2.1%.
Second, the Fed may open a window of communication in several meetings in the future, formally announce the reduction of the scale of asset purchases in the fourth quarter interest rate meeting, and begin to gradually reduce the scale of quantitative easing in 2022. The main factor of the Fed’s monetary policy adjustment on the economy and the market is the unexpected “reduction panic.” After full communication and expected construction, the official launch of the reduction of asset purchases will have relatively small impact. Therefore, in the short term, we must pay more attention to the impact of expected changes on market trends and the possibility of market fluctuations.
Third, the time between the start of reducing the scale of asset purchases and the initiation of interest rate hikes may be shorter than the nine-month reduction time taken by the Fed to withdraw from the third round of large-scale asset purchases from 2013 to 2014. We believe that the Fed may start to reduce the scale of asset purchases by an average of US$10 billion to US$15 billion per month from 2022.
Fourth, if the pace and intensity of the economic recovery are in line with expectations, the Fed may consider raising interest rates no earlier than 2023.
Fifth, the recent decline in US inflation expectations, lower-than-expected macroeconomic data, excess liquidity in the financial system, strong demand for national debt issuance, and blockage of infrastructure bills in Congress have all contributed to the recent decline in U.S. interest rates. However, in the medium term, US bond interest rates are expected to continue to rise and may reach a high of 2%, and then may fall.
Historical data shows that when the Federal Reserve began to reduce the scale of asset purchases, the US dollar index continued to strengthen in most cases. In the process of exiting the quantitative easing policy, the reduction in the size of bond purchases may put pressure on U.S. bonds, but the actual value of U.S. bonds is still determined by the relative changes in the U.S. dollar and U.S. bonds.
Follow-up recommendations are to observe the Federal Reserve and other major economies’ central banks’ resignation of the easing policy and the timing of its initiation. If the Fed has a time gap to withdraw from easing, U.S. bond interest rates and the U.S. dollar index are expected to be supported. More relevant to the performance of the commodity market is the implied rate of return, rather than the federal funds rate; among commodities, crude oil prices are strong, while gold prices are slightly inferior.
We expect that after this interest rate meeting, the themes of U.S. stock market reinflation and high interest rates will receive further support. For the stock market, the rising uncertainty of the Fed’s monetary policy and the expectation of interest rate hikes may put pressure and amplify volatility on the technology leaders and high-value, liquidity-driven sectors of the U.S. stock market. The capital allocation will switch from growth stocks to Value stocks and cyclical stocks were switched from emerging markets to developed markets.
We believe that the market has predicted and reflected the reduction factors. The systemic, contagious, and large-scale “reduction panic” in 2013 will not recur in emerging economies as a whole. The normalization of the Federal Reserve’s monetary policy will affect emerging economies. The spillover effect of the body is different. The normalization of the Fed’s monetary policy has little effect on my country’s monetary policy as a whole, but there may also be risks and uncertainties in cross-border capital flows under open conditions.
(Editor: Lu Yueling)