Guan Qingyou: Start paying! The Fed officially announced Taper, starting to reduce QE

　　Text/Opinion Leader Guan Qingyou

　　Taper officially announced that the pace of bond purchases was clearly slowed down, and interest rate decisions were made unchanged

　　The FoMC in October made it clear that "if the economy continues to make progress as expected, the pace of asset purchases is likely to slow soon". The November 4 FOMC validated our assumptions that the Fed expects to begin formally downsizing its bond purchases in mid-to-late November, reducing its purchases by $15 billion per month, including $10 billion in Treasuries and $5 billion in institutional-backed securities. Until there are no signals from inflation and employment data, the Fed will maintain this taper cadence and is expected to close its bond purchases in July 2022. On the interest rate front, the Fed continues to keep the federal funds rate range unchanged at the 0%-0.25% level. Powell expects that in the second or third quarter of 2022, powell will only start to raise interest rates in the second or third quarter of 2022, when inflation has eased.

　　The interest rate hike process is not mentioned, inflation and employment are the main indicators, and the Fed waits to see how it changes

　　The dot plot for rate hikes has not changed, with 9 members expected to raise rates in 2022, up from 38.9% in June to 50.0%, and 17 members expect to raise rates in 2023, up from 72.2% to 90.0%. Six members are expected to raise rates once in 2022 and three are expected to raise rates twice in 2022; all but one member is expected to start raising rates in 2023, and more than 70% of officials believe that at least two rate hikes will be raised in 2023. At present, although the dot matrix chart can give us certain expectations, the atypical economy under the epidemic also needs atypical countermeasures. Powell did not respond positively to the rate hike process at the meeting, but mentioned inflation and employment, two seemingly contradictory signs of rate hikes. If U.S. inflation continues to spiral out of control, or if employment data reaches a "full employment" state, the interest rate hike process may be advanced.

　　Non-farm payrolls run counter to the employment rate, and "full employment" is a signal for interest rate hikes

　　Non-farm payrolls in the United States in August were dismal, with non-farm payrolls adding 235,000, well below the market's general expectation of 725,000. The number of new non-farm payrolls in the United States in September was 194,000, which was lower than expected for the second consecutive month. The market expects the US non-farm payrolls to increase by 425,000 in October, and the exact data will be released on Friday. The Fed's unemployment forecast for 2022 and 2023 remains unchanged at 3.8% and 3.5%, and the unemployment rate is expected to continue to decline, optimistic about the economic recovery in the next two years, but the emergence of the "resignation wave" has led to the unemployment rate losing its guiding role, resulting in the "employment prosperity illusion", making us see the phenomenon that the number of non-farm payrolls runs counter to the unemployment rate. Powell believes that this contrary phenomenon is due to the impact of the epidemic, and after the epidemic will gradually return to normal, and when employment returns to "full employment" is one of the signals that the Fed can raise interest rates.

　　Continue to maintain your inflation target and launch interest rate hikes if necessary

　　The U.S. Consumer Price Index (CPI) rose 0.4% month-on-month and 5.4% year-on-year in September, both exceeding general market expectations and rising for 6 consecutive months, powell admitted that inflation lasted longer than the Fed expected, but also re-inflation was only temporary. Powell expects inflation to ease somewhat in the second to third quarters of 2022, returning to near the Fed's long-term inflation target of 2%. At the same time, the Fed also said that once inflation is out of control, the Fed will accelerate the pace of interest rate hikes.

　　The taper signal is basically in line with market expectations, and the Fed communicated with the market in advance, and the pullback was smaller than in 2013

　　Due to the sudden announcement of the taper by the Federal Reserve in May 2013, the global financial markets appeared "shrinking panic", suffered a comprehensive setback, the US Treasury rose by more than 50 bp in 1 month, the S&P 500 and nasdaq indexes fell by more than 4%, the CSI 300 fell by more than 10%, the Thai set index fell by more than 17%, and commodities plummeted across the board. Therefore, the Fed is very cautious this time, fully communicating with the market in advance since July, reserving the window period, and increasing the management of expectations. The Fed's communications in recent months have been apparent. U.S. stocks showed some volatility at the opening of the day, but the volatility was generally smaller than that of other emerging markets. And after the Fed announced its decision, the collective rebounded, the three major indexes hit a record high, A-shares and Hong Kong stock markets also appeared after the meeting, taper's expected management effect is remarkable.

　　Continue to pay attention to the interest rate hike process and be vigilant about the debt ceiling

　　The pace of fed rate hikes is another market concern, and while the Fed is still insisting that inflation is only a short-term problem caused by the supply chain, it remains to be seen how long inflation will last. And once inflation spirals out of control, the Fed will have to accelerate the pace of interest rate hikes, possibly even triggering a recession that could affect global markets. At the same time, the issue of the U.S. debt ceiling is still unresolved. In October, the bipartisan bill in Congress passed a provisional bill delaying the debt maturity problem to December 3, and the US debt problem was not resolved. At that time, the two parties will choose between a debt ceiling increase and a debt ceiling suspension, or whether they will fail to reach a consensus and lead to a us debt default, we need to continue to track. The impact of debt default is immeasurable, there may be a risk of government shutdown, it will deplete the credit of the United States, trigger a huge earthquake in the US financial market and even the global financial market, and have catastrophic consequences, which is indeed "the currency of the United States, the problem of the world". In the short term, the US Congress cannot turn a blind eye, as long as the dollar hegemony still exists, the Fed will start a printing press to dilute debt, which is indeed a tried and tested trick. But in the long run, U.S. debt is snowballing and riskier, but there will always be an unsustainable day when the risk is immeasurable.

　　This article was originally published in Yicai

　　(Introduction of the author of this article: Such is the president of the Institute of Financial Research and chief economist.) )