As the most important weather vane in the global market in 2022, the Fed's interest rate hike is almost a foregone conclusion, but when the rate hike will come has been unresolved.
On the 15th and 16th local time, the Fed interest rate meeting was underway. The agency's post-meeting statement has long been interpreted as "a signal of possible future policies." Today, the global market is waiting for the moment when the boots are on the ground.
It was the first meeting since Fed Chairman Jerome Powell said last month that the Fed needed to "shift its focus from boosting jobs to preventing rising inflation from becoming the norm," foreign media reported. Analysts believe that Powell's "dove" to "eagle" remarks mean that the Fed has a major adjustment in the post-meeting statement, releasing more signals to tighten monetary policy and clearing the way for the first interest rate hike next year.
When the "dove" turns to the "eagle", what will change at this meeting of the Fed?
Since the COVID-19 pandemic, the US inflation rate has continued to be "high fever" and difficult to retreat, and the core inflation indicator CPI rose 6.8% year-on-year in November, hitting a new high in nearly 40 years, and it is likely to continue to heat up in December.
Under intense inflationary pressures, Powell changed his stance for the first time at U.S. Congressional hearings on November 30 and December 1, saying that the Fed's statement would no longer characterize high inflation as "temporary," in part because the term was "confusing."
↑ The analysis believes that the Fed meeting will clear the way for the first interest rate hike next year.
"Almost all forecasters expect inflation to fall significantly in the second half of next year, but we can't act as if we're pretty sure of it, and we're not sure about it." he said. He also made it clear that the risk of a further rise in inflation increases, the threat of continued high inflation, and that rising prices are linked to supply chain disruptions caused by the COVID-19 pandemic, while the Fed has previously ignored the seriousness of supply-side problems on inflation.
Foreign media analysis said that the Fed may also revise some of the statements that "inflation has been below 2% since September 2020", and Powell said last month that "this language sounds a bit out of touch with reality". In addition, the Fed may update its economic forecasts, as the current decline in unemployment and rising inflation are higher than they expected in September.
Analysts predict that as the U.S. unemployment rate drops to 4.2 percent in November, Fed officials expect to announce at the end of the meeting that they will double the pace of scaling back their bond-buying stimulus program. Previously, several Fed officials, including Powell, had signaled that the plan might end in March instead of June.
In early November, the Fed announced a monthly cut in asset purchases of $15 billion, including $10 billion in U.S. Treasury bonds and $5 billion in institutional mortgage-backed securities, Xinhua reported. At this rate, the Fed's asset purchase program, which was supposed to end in June next year, could end prematurely.
Foreign media pointed out that the Fed's move to accelerate this process is the "most concrete sign" that interest rate hikes change inflation. Therefore, after the end of asset purchases in the first quarter of next year, the Fed will start to raise interest rates in the second or third quarter, and steady tightening will be a high probability event.
Other elements of the Fed's post-meeting statement, economic forecasts from officials, and Powell's post-meeting press conference could provide further clues about the outlook for its rate hike policy. In September, Fed officials split the issue of whether to start raising rates in 2022 or 2023. And new projections show that most people now expect multiple rate hikes in 2022.
↑Powell has previously signaled more tightening of monetary policy.
Since the COVID-19 pandemic, the Fed has kept interest rates close to zero, trying to further increase market liquidity and provide financial assistance to participants. Under this trend, traditional investments can no longer generate huge profits, prompting investors to turn to riskier assets. Once the Fed starts raising interest rates, the overall market is expected to shift to a "risk-off mode" and invest in safer investments.
Can I "raise interest rates as desired"? Market reactions vary from side to side
However, whether the Fed can "get" the interest rate hike is still facing huge difficulties. Foreign media analysis pointed out that the emergence of the new crown virus mutation strain Omilon has once again disrupted the global market, making the prospects complicated again, although the influence is not clear, but the continuous recurrence of the new crown epidemic will be a great test for the economy. Some critics worry that the Fed's current shift to policy risks repeating the mistakes of the past year, arguing that the new framework is flawless but that the way it is implemented is too much to tie the hands and feet of Fed officials.
And as the Fed is laying the groundwork for a cycle of rate hikes, the reactions vary.
After a new record high in U.S. inflation data in November, Goldman Sachs and other Wall Street investment banks predicted that the Fed would accelerate asset purchases at this week's rate meeting and complete at least two rate hikes next year.
On Monday, Morgan Stanley CEO James Gorman said in an interview that the Fed should raise interest rates as soon as possible while economic growth is relatively strong to cope with future economic downturns. Goldman said financial markets may be temporarily upset, but raising interest rates will not slow the U.S. recovery.
However, the bond market has warned that this cycle of rate hikes could be unusually limited. Because in general, if the Fed interest rate meeting accelerates the narrowing of the bond purchase program and raises interest rates, it will boost the dollar. Maintaining the current pace of bond purchases or lowering the odds of raising interest rates could bring the dollar index back down.
If, as currently predicted, the Fed will raise interest rates in mid-2022, the U.S. Treasury yield curve (i.e., the spread between short- and long-term interest rates) will reach its lowest level as the tightening cycle begins. Foreign media analysis pointed out that the flattening level of US Treasury yields shows that investors believe that the Fed cannot take more action until it has to pause or have to turn around when the economic recovery is threatened.
Economist Jersey (Ira F. Jersey and Angelo Manolatos noted in their analysis: "In our view, the interest rate market expects the Fed to raise interest rates by a limited margin during this cycle. For now, markets seem to think the Fed could raise interest rates prematurely, leading to an already fragile economic recovery slowing, but that could shift in mid-2022. ”
Meanwhile, as the Fed's interest rate meeting convenes, U.S. stocks continue to move lower for two consecutive days, and investors are watching closely to see how quickly the Fed will end the accommodative monetary policy that has driven the stock market up as the number of confirmed covid-19 infections increases and the spread of the new variant, Omicron.
Sam Stovall, chief investment strategist at CFRA Research, said investors were dumping assets that have always been highly valued, such as tech and consumer discretionary stocks. Because as we all know, the impact of interest rate hikes on these highly valued assets is greater, and once the market's risk appetite declines, highly valued technology stocks will face a greater risk of "killing valuations".
The cryptocurrency market has quietly entered a situation of "extreme panic". Once the Fed starts raising interest rates, "extremely risky" cryptocurrencies may suffer a huge shock.
Red Star News reporter Xu Huan
Edited by Zhang Xun
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