In the statement of the interest rate meeting in March, the Federal Reserve raised interest rates by 25bp and said it would continue to raise interest rates and shrink the table soon. In the early morning of March 17th, the Fed released its latest interest rate statement, in which committee members voted 8 to 1 to raise the target range of policy interest rates by 25bp to 0.25% to 0.5%, and predicted that "continued interest rate increases are appropriate." It is worth mentioning that St. Louis Fed Chairman Brad believes that the rate hike in March should be 50bp. After the start of the interest rate hike, the Fed is expected to open the contraction table at a subsequent meeting, but did not mention the specific time and operational details.
In the interest rate statement, the Fed deleted the negative impact of the epidemic, emphasized inflationary pressure, and discussed the possible impact of the conflict between Russia and Ukraine. The Fed's interest rate statement deleted "the negative impact of the epidemic" and continued to believe that "economic activity and employment indicators remain strong", emphasizing that "inflation remains high. It reflects the imbalance between supply and demand related to pandemics, rising energy prices and broader price pressures. As an addition, the Fed believes that "the impact of the conflict between Russia and Ukraine on the US economy is highly uncertain, or it may put additional upward pressure on inflation".
In terms of economic forecasts, the Federal Reserve sharply raised its inflation forecast for 2022 and lowered its economic growth forecast. As part of its quarter-end meeting, the Federal Reserve released its latest economic forecast (SEP). Among them, the GDP growth forecast for 2022 was sharply reduced from 4 per cent to 2.8 per cent, and core PCE inflation expectations were raised sharply from 2.6 per cent and 2.7 per cent to 4.3 per cent and 4.1 per cent respectively, reflecting the Fed's concern about the pressure of "stagflation" during the year. But there has been little change in the Fed's forecast for the unemployment rate, suggesting that the job market is "fully employed" and sustainable.
In the interest rate bitmap, the Fed sharply revised up its interest rate forecast for 2022-2024, suggesting that the current cycle of raising interest rates may be larger than that of the previous round. Of these, 12 officials (accounting for more than 2) expect to raise interest rates at least seven times (one for 25bp) in 2022, far more than the three predicted in December. In addition, more than half of officials expect the benchmark interest rate to rise to more than 2.75% by the end of 2023, up from the 1.5% forecast in December. This means that the Fed may raise interest rates more than 11 times this time, more than nine times in the previous cycle.
At a news conference, Federal Reserve Chairman Colin Powell reiterated that fighting inflation is a top priority and playing down the risk of recession. Specifically, Powell believes that "all tools will be used to avoid long-term high inflation, and if the inflation data exceed expectations, the Fed will raise interest rates more quickly," once again demonstrating its determination to fight inflation. Powell played down fears of a US recession, saying that "the economy is strong and can withstand tightening of monetary policy". As for the shrinking table that the market is concerned about, Powell said that "the plan to reduce the table will be announced as soon as May, and the framework will be similar to the previous one, but faster."
Powell's mild words eased market concerns and boosted confidence, US stocks staged a V-shaped reversal and 10Y US bond interest rates rose sharply. The Fed's interest rate statement, the "hawkish" signal from the bitmap, and the "stagflation" concerns revealed by the economic forecast led to a sharp fall in US stocks and a sharp rise in interest rates on 10Y Treasuries. However, Powell's gradual wording revealed a moderate policy stance, which significantly alleviated market concerns about the adverse effects of US "stagflation" and policy tightening. Us stocks staged a V-shaped reversal and 10Y US debt interest rates continued to rise.
To reiterate the view: although the market has relatively fully digested the expectations of raising interest rates, further digestion of the expectations of the contraction table in the future may make the world's major capital markets continue to be highly volatile and highlight the value of gold allocation. Underpricing of global inflation and policy normalization will remain an important factor affecting global asset pricing. The expectations of the Fed to raise interest rates have been digested to a large extent, but the impact of the contraction is still not digested enough, and the global capital markets may continue to fluctuate in the short and medium term. In this context, as one of the best hedging assets, the allocation value of gold has been revealed.
Risk Tips:
1. The novel coronavirus epidemic in the United States rebounded faster than expected. The sharp rebound in new confirmed cases in the United States has triggered a run on medical resources and tightened epidemic prevention measures, dragging down employment repair in industries with high risk of virus exposure.
2. The employment willingness of the American labor force remains depressed. Factors such as "post-epidemic trauma" have suppressed the employment will of the American labor force more than expected, resulting in a sharp slowdown in the recovery of subsequent employment.
