Open Source Securities Zhao Wei Team: The next step for the Fed to turn "Eagle"

　　Zhongxin Jingwei November 1, recently, the team of Zhao Wei, chief economist of Kaiyuan Securities, released a report saying that looking at the present, the Federal Reserve will start Tapers within this year, and the disturbance of the market will tend to weaken. Referring to the experience of the previous round of monetary policy normalization, the impact of the rising expectations of the Fed's interest rate hike on the market is more worthy of attention.

　　The Fed frequently releases "eagles" to disturb market sentiment

　　The report pointed out that since September, a number of Fed officials have frequently released "hawkish" signals, such as "Start Taper as early as November" and "Raise interest rates in 2022". Since September, a number of Fed officials have changed their previous "dovish" stance and begun to blow the normalization of monetary policy. For example, Fed Chairman Jerome Powell has publicly stated that "Tape can be launched as early as November"; Bostic (2021 Vote) is more aggressive, "expecting to raise interest rates in the second half of 2022".

　　With the Frequent Release of the "Eagle" by the Federal Reserve, the fluctuations of us stocks and other fluctuations have been magnified, the US dollar has strengthened, and the 10-year US Treasury interest rate has also regained its upward trend. In the context of the Fed's sharp turn to "eagle", the market's risk appetite once fell rapidly, dragging down the performance of major global stock indexes such as the US stock market, and the largest drawdown since the S&P 500 and nasdaq since September was 5.2% and 7.2%, respectively. Meanwhile, the dollar index held steady at the 94 mark and the 10-year U.S. Treasury rate rose near 1.6 percent.

　　The core objectives of Fed policy are job maximization and price stability

　　The report mentions that as a monetary policy authority with "political" independence, the Fed's core goal is to maximize employment and price stability. After the promulgation of the Federal Reserve System Reform Act of 1977, the Fed defined the dual objectives of maximizing employment and price stability, which it has been used ever since. The main body of the Fed's monetary policy is THE FOMC, which has a relatively stable personnel structure and an open and transparent decision-making mechanism, which ensures the independence and effectiveness of the policy.

　　Under the dual objective, the Fed's policy is mainly based on economic fundamentals, and sometimes adjusts accordingly due to changes in the financial environment. Historical experience shows that the Fed has been keeping a close eye on economic fundamentals, often tightening the currency by raising interest rates and other stages of the economy and rising inflation, and vice versa. In addition, in extreme cases such as the outbreak of liquidity crisis, the Fed will also act as the lender of choice, releasing liquidity through interest rate cuts and QE.

　　Taper's disturbance to the market tends to weaken, and the change in interest rate hike expectations is more noteworthy

　　The report believes that looking at the present, driven by inventory replenishment and resident income repair, the US economy is expected to maintain resilience. The report points out that referring to the experience of policy withdrawal in 2013, Taper is almost ripe with the rapid repair of the US job market. The reason why the Fed has been slow to launch Taper since 2021 is that the job market has not made substantial progress. The latest September employment data shows that the number of jobs in the United States that have decreased due to the epidemic has been repaired to 78%. This is equivalent to the level when the Fed launched the Tape in 2013. Against this backdrop, Fed Chairman Jerome Powell, who has been unmoved, also admitted that "employment has made almost substantial progress." In other words, Taper is almost ripe.

　　At the same time, there are growing indications that inflation is not "temporary," leading to a sharply earlier forecast for future Fed rate hikes. The United States has always regarded the persistence of high inflation as one of the core considerations for initiating interest rate hikes. The latest data show that the U.S. CPI growth rate reached 5.4% year-on-year in September, which has been higher than 5% for four consecutive months. From the perspective of price increase range, most of the CPI sub-prices such as fuel, gas services, meat, poultry, fish and eggs, and new cars in the United States have continued to rise, indicating that inflationary diffusion pressure continues to accumulate. The persistence and diffusion of high inflation has caused U.S. consumers to reach a record high of 5.3% in 1-year inflation. The perception that the inflation situation is not "temporary" has raised the probability that the market predicts that the Fed will raise interest rates for the first time in June 2022 to 65%.

　　According to the report, experience shows that taper's actual impact on market movements is relatively limited, and the impact of the heating up of interest rate hikes on the market is more worthy of attention. Historically, the announcement of Taper at the end of 2013 and the implementation of the following month, the reaction of major assets such as US stocks, US bonds, and us dollars was slightly flat; but as interest rate hikes are expected to heat up, the adjustment of major markets has accelerated. Comprehensively considered, in the next 2-3 quarters, it is necessary to be vigilant against the policy stance of major Fed officials (especially FOMC members) continuing to turn "eagle", interest rate dot matrix adjustment, etc., triggering interest rate hike expectations to continue to heat up and aggravate market volatility. (Zhongxin Jingwei APP)