CITIC Securities: The Fed is expected to complete the Tape in March next year, raising interest rates for the first time in June

Wen 丨 MingMing Bond Research Team

At the December interest rate meeting, the Fed announced the acceleration of the Taper, the expression "temporary" inflation was officially removed, the dot plot showed 12 members who believed that interest rates would be raised at least 3 times in 2022, and the economic forecast continued to cut economic growth this year, while significantly raising the level of inflation. We expect the Fed to complete the Tape in March next year, the first rate hike in June, the current benchmark to judge the 2th rate hike during the year, the timing of the 2nd rate hike and the possibility of a 3rd rate hike depending on the US inflation and employment situation in the second half of next year and Powell's speech communication. In the short term, the 10-year US Treasury yield may fluctuate upwards, and the 10-year Chinese Treasury yield may be easy to go up and down.

Outcome of the interest rate meeting: In terms of interest rate instruments, the Fed continued to keep the benchmark interest rate unchanged at 0-0.25% at this rate of interest rate; in terms of asset purchases, it decided to slow down its monthly net asset purchases, reducing the purchase of $20 billion in Treasuries and $10 billion in MBS per month. Starting in January, the commission will increase the purchase of at least $40 billion in Treasury bonds and at least $20 billion in MBS per month. In terms of economic expectations, the Fed added the phrase "job growth has been steady in recent months and the unemployment rate has decreased substantially", and the expression "inflation mainly reflects temporary factors" has been officially deleted.

Policy Rate Forecast and Economic Outlook Forecast: The dot plot of the policy rate forecast shows that all members are expected to raise interest rates in 2022, and 12 members believe that they will raise rates at least 3 times in 2022. In terms of economic outlook, the Fed continues to lower its growth forecast for this year, while sharply raising its inflation forecast. GDP growth is expected to be 5.5% in 2021 and 5.9% in September this year; the unemployment rate is expected to be 4.3% in 2021 and 4.8% in September this year; and the PCE inflation rate is expected to be 5.3% in 2021 and 4.2% in September this year.

Powell's main points: High inflation has forced the Fed to accelerate the Tapers, which is expected to be completed by mid-March next year; the Fed's interest rate forecast is not a plan, economic progress will drive the process, if needed, the Fed will be prepared to raise interest rates, and the time from the completion of the Taper to the rate hike is unlikely to be as long as the last cycle, and it is possible to raise interest rates before the US economy achieves full employment. High inflation is the primary threat to full employment, and the U.S. economy is making rapid progress toward maximizing employment, with full employment expected in 2022.

After Powell turned eagle, Taper accelerated as scheduled, and Powell's words and deeds continued. The interest meeting officially announced that the monthly net worth purchase rate will be reduced by $20 billion in Treasury bonds and $10 billion in MBS starting next January, and Taper accelerated as scheduled. Earlier, powell changed the "inflation temporary theory" when attending the Senate Banking Committee hearing, while saying that the Fed may complete the Taper faster and will discuss it at the FOMC meeting in December. Powell's communication in this round of Taper is very good, and his words and deeds are consistent with the fact of objective existence. The key to focusing on the Fed's monetary policy in the future remains the belief in Powell's words and deeds.

Inflation statements changed significantly, "temporarily" was officially removed, and economic forecasts and Powell's speech showed a symbolic increase in Fed concerns about inflation. In the statement of the meeting, the discussion on inflation became "since inflation has exceeded 2% for some time, the Commission expects it would be appropriate to maintain interest rates in the target range of 0-0.25% until labour market conditions reach levels consistent with the Commission's assessment of maximum employment". And the inflationary "Transitory" that has always existed before was officially removed in the statement at this meeting. Meanwhile, in December's economic forecasts, the Fed's forecasts for PCE and core PCE were both significantly higher than before, superimposed on Powell's description of inflation, and the Fed's concerns about inflation markedly increased.

The dot plot continues to show that the rate hike is expected to be earlier, with the first rate hike timing or the point of advance to the middle of next year. Compared with September, the dot plot continues to show that interest rate hikes are expected to advance, with the current US inflation level hitting record highs, while the job market is also recovering steadily. In his post-meeting speech, Powell again stressed that interest rate expectations are not a plan and that actual economic progress will drive the hike, but also stressed that the time from the completion of the Taper to the rate hike is unlikely to be as long as the last cycle. Due to the more hawkish FOMC votes next year, the superimposed Taper acceleration will be completed ahead of schedule, but the impact of the Omicron variant strain remains to be seen, and the interest rate hike expected to be advanced or indicate that the Fed will raise interest rates at least 2 times next year, and the first rate hike may be advanced to the middle of next year.

It is expected that the Fed will complete the Tape in March next year, the first interest rate hike in June, the current benchmark judges that the interest rate will be raised twice during the year, the 10-year US Treasury yield may fluctuate upwards in the short term, and the 10-year Chinese Treasury yield may be easy to go up and down. Based on the dot plot of this rate meeting and Powell's speech, we believe that the Fed may complete 2 rate hikes in the next year, the time of the first rate hike or the time of the 2nd rate hike at the June 2022 rate hike, and whether there may be a 3rd rate hike depending on the US inflation and employment situation in the second half of next year. In terms of US Treasury interest rates, under the assumption that the Omicron variant strain has less impact, the dominant factor in US Treasury interest rates will still return to the game of inflation expectations and interest rate hikes expectations, and in the short term, the 10-year US Treasury yield may fluctuate upwards. For Chinese Treasuries, the 10-year Chinese Treasury yield may be easy to climb and fall as the Fed accelerates tapers and may raise interest rates early, while U.S. Treasury rates may fluctuate upwards.

This article originated from the financial world