What impact will the Fed have on the market if it cuts debt purchases or starts at the end of the year?

(Economic Observation) What impact will the Fed have on the market if it cuts debt purchases or starts at the end of the year?

　　China News Service, Beijing, September 23 (Reporter Xia Bin) The Fed's interest rate meeting has recently concluded. The latest statement keeps the federal funds rate unchanged in line with market expectations, and the Fed has also released a clearer signal on when to start reducing asset purchases in the future. .

　　"If the progress is roughly as expected, the pace of asset purchases may soon slow down." The Fed said in a statement after the end of the interest rate meeting.

　　Fed Chairman Powell mentioned in his speech that the wording in the statement means that the conditions for reducing the size of debt purchases ("Taper") may be met at the next meeting at the earliest.

If the economic trend continues to be in line with expectations, austerity measures can be easily adopted at the next meeting, and the reduction in bond purchases may end around the middle of next year.

The debt reduction will be gradual, and it is not expected that the pace of debt reduction will need to be accelerated.

　　"Taper boots are basically on the ground." The deputy director of the CITIC Securities Research Institute and the chief fixed income researcher clearly stated that the statement of this interest meeting meeting clearly gave information for the first time to reduce the scale of debt purchases.

Powell also paid more attention to Taper in his subsequent speeches. At the same time, he did not continue his usual "dovish" remarks, but more pave the way for Taper.

　　Li Chao, chief economist of Zheshang Securities, also said that in light of the latest guidelines, the Fed will most likely formally announce Taper at the November interest rate meeting and start it in December.

As for the pace of Taper, the average monthly Taper speed may need to reach 15 billion U.S. dollars according to the end point of the middle of next year.

　　Cheng Shi, chief economist of ICBC International, said that based on the US economic data in the past three months and the latest meeting minutes of this meeting, there are four reasons for the high probability of launching Taper in December this year.

　　First, the overall recovery of the US economy has exceeded expectations.

The overall recovery of the economy has provided a solid economic foundation for the start of debt reduction.

　　The second is the continued inflationary pressures in the United States.

The current level of overall inflation in the United States has met the conditions for the United States to initiate a reduction in debt purchases.

　　The third is that delaying Taper may create greater risks to the market.

Delaying Taper will boost U.S. inflation expectations further, and in the long run this will increase the risk of commodity and real estate market bubbles. If the Fed has to accelerate monetary tightening in order to cope with accumulated financial risks in the future, this may induce a new round of liquidity. Sexual risk.

　　Fourth, the US economy still faces many long-term uncertainties.

The early normalization of monetary policy will help in exchange for more policy space to deal with many uncertain long-term risks.

　　Every move of the Fed will have a spillover effect on the global market. What impact will Taper bring?

　　Cheng Shi believes that under general scenario assumptions, it is expected that the launch of Taper will not have too much impact on the market.

This is mainly because the Fed has fully communicated and provided forward-looking guidance to the market under the new monetary policy framework and its launch plan around Taper.

Therefore, the market's expectations for Taper will be reflected in price fluctuations in advance and will be gradually digested by the market.

　　In addition, the launch of Taper will not substantially change the fundamental situation of current market liquidity.

The current proliferation of market liquidity has led to continued low market interest rates, and the dual impact of ultra-low interest rates and strong supervision has in turn prompted liquidity to return to safe assets.

　　Tian Xuan, deputy dean of the Wudaokou School of Finance, Tsinghua University, pointed out that Taper’s impact on the market mainly comes from the reaction time from the official announcement to the implementation. In the short term, market preference is still high. However, after the implementation of Taper, the global market will enter turbulence. During the reaction period, the risk premium will rise, liquidity will undergo structural changes, a large amount of funds may continue to converge in the US market, and emerging markets are facing a significant risk of correction.

　　Tian Xuan also mentioned that during the Taper development period, the market is unlikely to have a large-scale long-term panic. There has been a market preview before, and every time the Fed signals about Taper, the market will gradually return to stability after a small shock in the short term.

　　Cheng Shi emphasized that Bernanke, then chairman of the Federal Reserve in 2013, mistakenly linked Taper with interest rate hikes, causing the market to trigger a tapering panic (Taper Tantrum).

Therefore, in order to avoid the impact of the shrinking panic in 2013 on the capital market, Powell has repeatedly made it clear that there is no connection between the end of Taper and the start of interest rate hikes.

Whether to raise interest rates in advance, the primary consideration is the specific situation of future US economic expansion rather than the impact of Taper.

(over)