Zhang Yu: The expected rise in interest rate hikes is not necessarily as expected

　　Zhongxin Jingwei November 5 Title: "Zhang Yu: The expected rise in interest rate hikes is not necessarily as scheduled"

　　Author Zhang Yu (Assistant Director of Huachuang Securities Research Institute, Chief Macro Analyst)

　　Fed taper (shrinkage) landed as scheduled, standing at the moment when the interest rate hike expectations are high and the Fed is dovish, the future Fed will guide the interest rate hike expectations to land as expected, or eventually less than expected, repeat the asset price trend in 2016 or 2018, more will depend on how the Fed "thinks" the interest rate hike and the market "thinks" how to game.

　　The rise in interest rate hikes is behind soaring inflation expectations

　　U.S. inflation expectations spiked in September, bringing rising expectations of rate hikes to a simultaneous pace. Consistently high U.S. inflation data, a sharp rise in non-farm payrolls, and fed officials increasingly acknowledging that inflation is not "temporary" and moving forward the dot plot have all contributed to a spike in inflation expectations. The timing of this round of higher interest rate hikes is basically consistent with the time point when inflation expectations are higher, and in the context of the current output gap in the United States has not narrowed further, the increase in interest rate hike expectations is mainly driven by the rise in inflation expectations.

　　So, will higher interest rate hikes necessarily lead to a rate hike? not necessarily. In the Fed's interest rate hike cycle after the financial crisis, market expectations have been wrong twice. In 2016, the rate hike was overestimated, and the market expected two rate hikes throughout the year at the beginning of the year, and since then, the expectation of a full-year rate hike has continued to fall short until the end of the year. In 2018, the rate hike was underestimated, and the market expected a rate hike of 2 times at the beginning of the year, but in fact, there were 4 rate hikes in the whole of 2018. It can be seen that the interest rate hike expectation only reflects the market's outlook for monetary policy in a specific period, and the increase in interest rate hike expectations does not necessarily land as expected.

　　Whether the expected rate hike matches the actual pace of the rate hike is still determined by the output gap and inflation. 2015 was a period of disruption in the recovery of the US economy after the financial crisis. The economy entered a destocking cycle, which led to a decline in the output gap, and the PCE (Personal Consumption Expenditure Price Index) also fell to around 0 year-on-year, and economic data fell short of expectations, resulting in a significantly slower-than-planned rate hike in 2016. In 2018, interest rates were raised faster than expected against the backdrop of an overheating economy (PCE reached more than 2% year-on-year).

　　How do asset prices work?

　　The Fed's interest rate hike in 2016 fell short of expectations: gold prices rose, 10-year US Treasury yields fell, and the US dollar index was weak; in 2018, interest rate hikes exceeded expectations: gold prices fell, 10-year US Treasury yields rose, and the US dollar index rose. It can be seen that whether the interest rate hike expectation is expected to be fulfilled as expected will have greater significance for asset prices than the monetary tightening environment brought about by the rate hike itself. At present, the pace of the Fed's policy turn is clear, but what makes more sense for subsequent asset prices is how hawkish it is and whether future interest rate hikes are expected to reverse.

　　The Fed's expected guidance on interest rate hikes may be the key to revising market expectations for rate hikes

　　The Fed's new monetary policy framework sets the inflation target at an average inflation target of 2% to allow for an increased tolerance for inflation. But the Fed did not account for the window for calculating average inflation. In the current context of high inflation, regardless of the window of observation, the level of inflation in the United States may already meet the average inflation target of 2%.

　　If only the Fed's dual goals of full employment and price stability are considered, the Fed's interest rate hike in 2022 is necessary, and the key lies in how the Fed communicates with the market about interest rate hike expectations. At present, the market has reached two interest rate hikes in 2022, the first rate hike is expected to be in September 2022, and from the fed's dual goal, the 2022 interest rate hike is also supported by fundamentals. However, the Fed has not yet released forward guidance for interest rate hikes, and how future interest rate hikes are expected to evolve depends more on the game between the market's "thought" rate hikes and the Fed's "thought" rate hikes. (Zhongxin Jingwei app)

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