Snow White: In the first half of the year, the Fed may maintain a more hawkish pace of interest rate hikes

China-Singapore Economics and Latitude, January 29 Title: In the first half of the year, the Federal Reserve may maintain a relatively hawkish pace of interest rate hikes

　　Author Bai Xue, Analyst, Research and Development Department of Oriental Jincheng

　　On January 27, Beijing time, the Federal Reserve announced the january Federal Open Market Committee (FOMC) meeting statement, announcing that it would keep the benchmark interest rate unchanged at 0-0.25%, but once again revised the forward guidance of interest rates, saying that "given that inflation is much higher than 2% and the labor market is strong, the commission is expected to be suitable for raising the target range of federal funds soon." In terms of bond purchase guidelines, it was decided to continue to reduce the monthly net asset purchase scale and let the asset purchase operation end in early March. Starting in February, it will increase its holdings of at least $20 billion in U.S. Treasuries and at least $10 billion in institutional mortgage-backed securities each month. In addition, the Fed also announced the "balance sheet reduction principle" guidance.

　　We believe that after the decision-making focus shifts to "anti-inflation", the Fed will start interest rate hikes as soon as possible to stabilize inflation expectations, and interest rate hikes in March are almost certain; in the first half of the year, the Fed may maintain a more hawkish policy stance and interest rate hike rhythm, the urgency and necessity of continuous rapid interest rate hikes in the second half of the year are reduced, the Fed's hawkish stance may be significantly weakened, and the tightening rhythm may slow down.

　　Since the Fed's policy decisions have shifted from the dual parallel objective of "employment + inflation" to a unified anti-inflation target, employment has not constituted a major obstacle to tightening policy, and the Fed needs to start interest rate hikes as soon as possible to stabilize inflation expectations. Considering that since the December 2021 interest rate meeting, the US inflation data has continued to rise, the CPI (consumer price index) has exceeded 7% year-on-year, and the crude oil price has been rising since January, driven by geopolitical risks, it is expected that before the March meeting, in the context of the epidemic interference, supply chain pressure has not eased, and labor supply and demand distortions still exist, US inflation is difficult to show signs of slowing; at the same time, inflation expectations in several major markets are also at a high level. This forced the Fed to implement interest rate hikes as soon as possible. According to the plan of this interest rate meeting, the launch of a rate hike in March is almost a foregone conclusion.

　　We judge that in the first half of the year, in the early days of tightening after the start of interest rate hikes in March, the inflation situation is still generally relatively grim, the Fed will still further strengthen the guidance of inflation expectations by maintaining a hawkish policy stance and rapidly tightening monetary policy, and the number of interest rate hikes will be about 2 times. However, from the perspective of the whole year, the uncertainty of the epidemic and the economic outlook requires monetary policy to retain a certain degree of flexibility and reversibility. This means that in the second half of the year, as inflationary pressures and inflation expectations fall, the economy decelerates, and the urgency and necessity of continuous rapid interest rate hikes are reduced, the Fed's hawkish stance may weaken significantly, and the pace of tightening may slow down.

　　In contrast to the optimistic judgment on the economic outlook at the December 2021 meeting, the statement at this meeting has revived and highlighted the continued concerns about the economic growth prospects of the epidemic, which will prompt the Fed to retain some flexibility and reversibility in the path of monetary policy normalization. On the one hand, the subsequent evolution trend of the epidemic is difficult to determine, and the emergence of subsequent new virus variants cannot be ruled out, which may delay the recovery of the economy and the job market, thereby restricting the fed's tightening rhythm; on the other hand, the fiscal stimulus decline and high inflation restrict the growth of private consumption, and with the tightening of monetary policy and the decline in corporate profit growth, the US economy may decelerate in 2022. We judge that the deceleration trend in the US economy will be more pronounced in the second half of the year after the opening of interest rate hikes. At the same time, considering that the direction of inflation decline in the second half of the year is more certain, the need for the Fed to raise interest rates continuously and rapidly will also be reduced. Taken together, this will mean that the Fed's hawkish stance may weaken somewhat in the second half of the year, and the pace of interest rate hikes may slow down. (Zhongxin Jingwei APP)

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