(Financial World) The first 50 basis point interest rate hike after more than 20 years, how does the Fed "tighten"?

　　China News Agency, Beijing, May 5 (Reporter Xia Bin) The Federal Reserve raised the U.S. federal funds rate by 50 basis points to a level of 0.75% to 1% at the May meeting on interest rates, in line with market expectations.

This is the largest rate hike by the Fed since 2000, that is, the rate hike at a single meeting reached 50 basis points, and it was also the first "back-to-back" rate hike after 2006, that is, two consecutive meetings to raise interest rates.

　　Looking back at the March interest rate meeting, although the Federal Reserve lowered the US GDP growth rate in 2022, the Fed's interim chairman Powell still insisted that the US economic growth still has room and resilience.

However, the recently released US GDP data for the first quarter was far below market expectations. The seasonally adjusted annualized rate of GDP fell to -1.4%, and the ISM manufacturing purchasing managers index slowed down in April.

　　Cheng Shi, chief economist of ICBC International, bluntly said that the current round of Fed rate hikes by 50 basis points has landed as scheduled, reflecting that the Fed is not too worried about the expected impact of the current economic slowdown.

　　He pointed out that, in fact, judging from the US economic data in the first quarter, personal consumption expenditures, non-residential fixed investment and residential fixed investment all increased. The main reason for the decline in its economic growth was the decline in inventory investment, which was caused by high inflation. The wholesale and retail of automobiles declined significantly.

　　After the interest rate meeting, Powell said that inflation is too high right now, the Fed understands the difficulties faced by the American people, and the Federal Open Market Committee also has corresponding tools.

The labor market is extremely tight right now, so keeping inflation down is necessary to maintain a strong labor market.

There is now a "good chance" of a soft landing for the U.S. economy.

　　Liu Zhengning, a macro analyst at the Research Department of CICC, believes that the Fed's wishes are good, but to achieve a "soft landing" in the current complex macro environment requires not only amazing skills, but also a lot of luck.

　　After raising interest rates by 50 basis points for the first time in more than 20 years, what will the Fed do in the future during the tightening process of adjusting monetary policy?

　　Before the meeting, the Fed frequently released hawkish signals, and the pace of tightening exceeded market expectations.

Previous data from CME (Chicago Mercantile Exchange) showed that the market expects the Fed to raise interest rates by 75 basis points in June after raising interest rates by 50 basis points in May. Although Powell did not clarify the end point of interest rate hike at this interest rate meeting, he almost The possibility of raising interest rates by 75BP in a single interest rate meeting in the future was ruled out, which made the market "sigh of relief".

　　Powell also revealed that if the follow-up economic situation develops as expected, then the next two interest rate meetings will raise interest rates by 50 basis points in a row.

　　In other words, although a 50 basis point interest rate hike at a single meeting is the first time in more than 20 years, the Fed's monetary policy adjustment path is expected to be no longer "radical" in the short term, which will also help reduce market panic.

　　The market after being "pacified" also responded positively. As of May 4, local time, the three major U.S. stock indexes closed sharply higher, the Nasdaq rose 3.19%, the S&P 500 rose 2.99%, and the Dow rose 2.81%.

　　However, it should also be noted that the Federal Reserve has increased the wording that it attaches great importance to inflation risks in its policy statement, and Powell has repeatedly emphasized the importance of price stability and the severe consequences of runaway inflation at the press conference, in order to reiterate that the current core goal of the Federal Reserve is to Control inflation.

　　Liu Zhengning mentioned that when asked if he has the courage to suppress inflation at the expense of recession, Powell gave a more positive response and hinted that he has the courage to fight inflation like former Federal Reserve Chairman Volcker.

Powell's remarks still leave room for more aggressive tightening that may occur in the future. If the subsequent inflation exceeds expectations, the Fed's tightening is also logical.

　　The market had previously believed that the Fed would begin to shrink its balance sheet in May, and the scale of the shrinking of the balance sheet was US$60 billion in US Treasuries and US$35 billion in MBS (mortgage-backed securities) per month, and the final result was more moderate. The meeting was announced to start. The balance sheet reduction plan, starting in June, will reduce assets and liabilities by $47.5 billion per month from the $9 trillion balance sheet, and three months later, it will be reduced by $95 billion per month.

　　Cheng Shi pointed out that the maximum step of the Fed's balance sheet reduction plan is about 1.06% of the size of the balance sheet each month, and the pace of the reduction of the balance sheet is twice as fast as the previous round of balance sheet reduction (2017 to 2019).

Moreover, the Fed chose to passively shrink its balance sheet because the Fed is less motivated to actively shrink its balance sheet.

　　He explained that, on the one hand, short-term active selling of government bonds may have an impact on the overall liquidity of the market and amplify the sensitivity of the U.S. and international financial markets.

On the other hand, the active sale of government bonds is not conducive to the Fed's stabilization of market expectations. In the case of high market uncertainty, active sales of government bonds will affect the effect of the Fed's forward guidance.

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