The Federal Reserve, which has attracted worldwide attention, is finally about to start.
At 3:00 a.m. on January 27, Beijing time, the Federal Reserve released a statement on the monetary policy meeting in January 2022, showing that given that inflation is much higher than 2% and the labor market is strong, it is expected to be suitable for raising interest rates soon. abbreviated table.
At the same time, Federal Reserve Chairman Powell said at a regular press conference that there is a lot of room to raise interest rates without threatening the labor market, and he does not rule out raising interest rates at every Federal Open Market Committee (FOMC) meeting. "Shrink the table" in scale.
In the face of Powell's "hawkish" policy signal, U.S. stocks plunged by a thousand points.
The Dow, which rose more than 500 points in early trading, quickly dived, with a drop of more than 400 points in the day, and the largest intraday decline was close to 1,000 points. The largest intraday declines of the S&P and Nasdaq were more than 1%.
During Powell's speech, the yield on the 10-year U.S. Treasury bond soared, reaching about 1.87% at the close of U.S. stocks, up about 10 basis points within the day; the yield on the 2-year U.S. Treasury bond also rose sharply during the session, with an intraday increase of more than 14 basis points , the largest single-day increase since March 2020; the U.S. dollar index also rose sharply, reaching 96.5, a new high since late December last year.
Powell "scared" US stocks
This meeting of the Federal Reserve has attracted much attention, not only because it is the first policy meeting in 2022, but also the last meeting before the Fed completes the reduction of bond purchases in March, which will clarify the next policy trend.
At 3:00 am Beijing time on January 27, the Federal Reserve announced after the meeting that the members of the Federal Reserve Monetary Policy Committee (FOMC) unanimously decided to maintain the target range of the federal funds rate, the policy rate of 0 to 0.25%, unchanged, in line with market expectations.
At the same time, the latest resolution announced that the tapering of bond purchases (Taper) will end in early March, when it will "soon" fit within the target range for raising the federal funds rate.
However, the strong signal about raising interest rates and shrinking the balance sheet caught the market by surprise.
The Fed's monetary policy meeting statement said that in an environment of high inflation and strong employment, interest rates should be raised soon.
Given that inflation is well above 2% and the labor market is strong, an upward revision to the federal funds target range is expected to be appropriate soon.
In fact, the market has already prepared for the expectation of raising interest rates.
Before the meeting, Wall Street institutions had formed a consensus. Goldman Sachs' latest forecast that the Fed will adopt a more aggressive strategy this year, and the number of interest rate hikes may exceed four times; in addition, data from the Chicago Mercantile Exchange also showed that traders expected 3 The odds of a monthly rate hike are as high as 95%, and the odds of four hikes this year are more than 85%.
Therefore, the three major U.S. stock indexes collectively opened higher and maintained their upward trend throughout the day. After the "boots landed", U.S. stocks rose sharply during the session. The Dow once rose 500 points, the Nasdaq rose 440 points or more than 3%, and the S&P rose more than 3%. 2%, blue-chip technology stocks rebounded across the board, Apple, Microsoft and other six technology stocks and Tesla collectively rose more than 2% during the session.
However, at the subsequent press conference, Fed Chairman Powell suddenly threw a blockbuster "bomb": without threatening the labor market, there is a lot of room to raise interest rates, and it is not ruled out that every time the Federal Open Market Committee (FOMC) ) meeting to raise interest rates, and even need to shrink the balance sheet on a large scale, and start discussing the reduction of the balance sheet after at least one interest rate hike.
As soon as the words fell, the three major U.S. indexes quickly dived and turned down. The Dow, which rose more than 500 points in early trading, once fell by more than 400 points in the day, and the largest intraday decline was close to 1,000 points. The S&P and Nasdaq fell by more than 1%. .
As of the close, the Dow fell 0.38%, the S&P 500 fell 0.15%, and the Nasdaq rose 0.02%.
Large technology stocks also fell across the board. Apple closed down 0.06%, Amazon closed down 0.8%, Netflix closed down 1.83%, Google closed up 1.81%, Facebook closed down 1.84%, and Microsoft closed up 2.85%.
Most popular Chinese concept stocks fell, Pu Xin Education fell 16%, iQiyi fell 13%, Jinshan Cloud fell 11%, Pinduoduo fell 9%, Dingdong Maicai fell more than 7%, Bilibili They fell by more than 6%, Didi and Daily Youxian fell by more than 5%, and Alibaba fell by 4.76%.
During Powell's speech, the yield on the 10-year U.S. Treasury bond soared, reaching about 1.87% at the close of U.S. stocks, up about 10 basis points within the day; the yield on the 2-year U.S. Treasury bond also rose sharply during the session, with an intraday increase of more than 14 basis points , the largest single-day increase since March 2020; the U.S. dollar index also rose sharply, reaching 96.5, a new high since late December last year.
In fact, before the Fed announced the policy of raising interest rates, it has already fully released the signal to the market to start raising interest rates, and the US stock market has also undergone a wave of adjustment. Therefore, when the policy is really implemented, the market will stage a "benefit to exhaust" market. , there was a significant increase in the intraday.
However, what the market did not expect was that Powell's speech would be so "hawkish", which may mean that the Fed's future monetary policy tightening will be more aggressive.
The market is more worried about: shrinking the table
Compared with raising interest rates, the market is more worried about the pace and intensity of the Fed's future reduction in the size of its balance sheet (shrinking).
In the early morning of January 27th, Beijing time, the Federal Reserve also announced an announcement called the "principle of shrinking the balance sheet". With the unanimous consent of the FOMC, it is suitable to provide information on the way of reducing the balance sheet.
At the press conference, Powell made it clear that he will steadily withdraw the easing policy in 2022. At present, he needs to shrink the balance sheet on a large scale. He will hold a meeting to discuss the reduction of the balance sheet after raising interest rates at least once, and will discuss it at least once. Hope Form reduction is an orderly and predictable process.
Market analysis shows that, unlike the last round of slow balance sheet reduction, the Fed’s current round of balance sheet reduction may be faster and more intensive. The superimposed holdings of mature U.S. bonds are mainly medium and long-term, which may boost the long-term interest rate of U.S. bonds, exacerbate market volatility.
Powell said at a news conference that long-term U.S. debt is an important global asset and that the Fed will avoid a collapse of the financial system.
The urgency of shrinking the balance sheet is mainly related to the rapid expansion of the Fed's balance sheet.
From the beginning of 2020 to December 22, 2021, the total size of the Fed's balance sheet rose from $4.17 trillion to $8.79 trillion, an increase of 110.8%.
Investment banks in the industry generally predict that the second half of this year may be the best window for the Fed to start shrinking its balance sheet after the rate hike cycle starts.
In the Bloomberg survey, 29% of respondents expected the shrinking of the balance sheet to begin in April-June, and 40% expected it to begin in July-September.
Economists' median forecast for the monthly balance sheet reduction was between $40 billion and $59.9 billion.
The survey also showed that shrinking the balance sheet will reduce the size of the Fed's balance sheet to $8.5 trillion by the end of this year and $7.6 trillion by the end of 2023.
Wells Fargo believes that the Fed may announce a quantitative tightening plan at its September meeting and begin formal implementation in October.
The bank said any new clues to the details of the reduction would be important now, especially as it relates to the multiple unanswered questions of timing, pace and composition.
The bank is leaning that its January meeting minutes, released on Feb. 17, may contain more key information on the subject.
Nomura Securities continues to expect that the Fed will announce a reduction in its balance sheet at its July meeting, and it will officially shrink its balance sheet in August. The rate of shrinking the balance sheet will increase from $20 billion per month ($12 billion in U.S. Treasuries and $8 billion in MBS) to the largest in December. $100 billion per month.
The Fed's 2 Core Goals
The pace of the Fed's rate hikes and when it will shrink its balance sheet still mainly depends on how the Fed assesses "full employment" and "inflation" in the United States.
Sinolink Securities believes that once the Fed determines that "full employment" is achieved and inflation pressures are high, the next interest rate hike and balance sheet shrinkage will be "natural".
The U.S. core CPI in December has reached the highest level in 30 years. Although the supply chain bottleneck may gradually ease in 2022, the current serious imbalance between supply and demand in the U.S. job market has driven high wage growth, prompting labor costs to replace supply chain bottlenecks and become the core of the U.S. main driver of inflation.
In its latest resolution, the Federal Reserve stated that the supply-demand imbalance related to the epidemic and the resumption of economic work have continued to contribute to high inflation.
The risk, Powell said at a news conference, is that high inflation will persist and that a return to expansion will require price stability.
Obviously, one of the conditions for the Fed to raise interest rates: inflation, has been met.
And on the last condition for the March rate hike: "full employment."
In response, Powell said the job market has been improving broadly and the labor force participation rate has increased but remains subdued.
The labor market is "very, very strong" and will likely continue to be so.
It can be seen that the Fed's start of raising interest rates in March is a certainty.
Powell emphasized that the two major functions of achieving full employment and maintaining price stability require the Fed to withdraw its easing policy.