SMM5, March 31-the Federal Reserve of New York said on the 30th that the Federal Reserve will reinvest the principal of institutional bonds and mortgage-backed securities (MBS) through the secondary market, which will begin in October 2019. The reinvestment in US bonds will fall within the limit of $20 billion a month, and any excess will be reinvested in the agency MBS. The first arrangements for the purchase operation are scheduled to be released on October 11. FOMC has announced that it will end its scaling down in September. Trump at the White House should be very happy to hear the good news.
On the 30th, the United States released two quite important figures. The US GDP was revised down from 3.2 per cent to 3.1 per cent in the first quarter, and the core PCE price index was revised down from 1.3 per cent to 1 per cent in the first quarter, especially the latter. The Fed is very concerned about the weakness of potential inflation in the US. The United States has two major inflation indicators, the CPI and PCE, Fed pay more attention to the PCE price index, the Fed's monetary policy is mainly based on the PCE price index to adjust, the Fed's long-term inflation target is set at 2%. The core PCE price index refers to the inflation rate after excluding energy and food, and is considered to be a good indicator to describe the potential inflation trend.
Since the outbreak of the financial crisis, the Fed's balance sheet has soared to $4.5 trillion after three rounds of quantitative easing, and huge amounts of money have flowed around the world. After the economy gradually recovered, the Fed finally began to shrink its balance sheet in October 2017. So far, the balance sheet has shrunk by $500 billion, a small achievement. However, since 2018, the world economy has been going downhill, and the Sino-US trade war has been going on for a long time, which has also had a certain impact on the US economy. Although the US economy is growing well, the labour market is still booming and unemployment is at a half-century low, it is still hard to hide the risk of weak inflation and upside-down interest rates on US bonds. The Fed is worried that continued contraction will have a negative impact on the market and will not be conducive to economic growth, so the Fed began to reduce the size of the monthly contraction a long time ago and decided to completely end the contraction in September.
The picture shows the balance sheet of the Federal Reserve.
We know that the monetary policy of the central bank has a decisive impact on the country's economic development, whether it is to cut the rate or cut interest rates, shrink the table, and so on, will attract great attention, especially the Federal Reserve. The dollar is the most important hard currency in the world, and the Fed's small moves have a huge herding effect.
The Fed's announcement to restart its bond-buying program is actually a new round of expansion, but not as radical as quantitative easing, but a modest expansion. Some experts have pointed out that the monthly maturity of MBS principal to buy short-and medium-term US Treasurys, holding down the short-term yield of US bonds, has a similar effect of interest rate cuts. That is to say, the Federal Reserve seems to be expanding its meter, but in fact it is cutting interest rates. Once the United States starts this plan to expand its meter, it is actually implying that the US economy is really experiencing problems. Well, at that time, there will certainly be many central banks that will follow the operation of the Federal Reserve. Either cut interest rates directly or start buying bonds, and a wave of central bank rate cuts are expected in the second half of the year.