The Federal Reserve Board of the United States announced the latest monetary policy statement on the 28th, confirming that it has begun discussions on reducing debt purchases, which is in line with market expectations. In response to the possible policy shift in the United States in the next few months, more and more central banks are preparing to adjust their own monetary policies in advance to deal with the spillover risks that may be caused by the Fed’s policy shift.
The Fed may shrink its balance sheet after September
The Federal Reserve concluded its two-day monetary policy meeting on the 28th and announced that it would maintain the target range of the federal funds rate between zero and 0.25%, which is in line with market expectations.
The Federal Reserve issued a statement on the same day that, with the progress of new crown vaccination and strong policy support, US economic activity and employment indicators continue to strengthen. The economic sectors most affected by the epidemic have improved, but they have not yet fully recovered. At the same time, the increase in the inflation rate largely reflects temporary factors, and the overall financial situation remains accommodative.
The Federal Reserve reiterated that the economic outlook will largely depend on the development of the epidemic. Advances in vaccination may continue to reduce the economic impact of the public health crisis, but risks to the economic outlook remain.
The Federal Reserve said in the statement that it will continue to increase its holdings of US Treasury bonds at a rate of at least US$80 billion per month, and purchase institutional mortgage-backed securities at a rate of no less than US$40 billion per month, until the two major goals of full employment and price stability Substantial progress has been made. The Fed believes that since December 2020, the U.S. economy has made progress towards these two goals, and the Fed will continue to evaluate these developments in future meetings.
Federal Reserve Chairman Powell said at a press conference after the meeting that with the support of vaccination and fiscal policy, US economic activity has continued to rebound from a downturn. However, supply constraints are inhibiting some industry activities, especially in the automotive industry in the context of a global semiconductor shortage, which has reduced its output significantly. At the same time, labor market conditions continue to improve, but they are still far from achieving a complete and balanced recovery.
Powell believes that the unprecedented economic restart process is pushing up inflationary pressures. In particular, supply bottlenecks in some industries limit the production speed and cause greater price pressure. As the economy continues to open up, the possibility of higher and more lasting inflation than expected is increasing.
But he also said that the current inflationary pressure is mainly concentrated in a few economic categories and has not spread to the entire economic field. In the short term, inflation risks may be upward, but in the medium term, inflation is expected to fall. If there are signs that long-term inflation expectations are “substantially and consistently” exceeding the target level, the Fed will adjust its monetary policy stance.
Reuters quoted the view of the chief economist of Capital Tertiary, Basta, saying that this “slightly optimistic” policy statement opened the door to the announcement of a slower debt purchase in September, provided that employment growth is strong and new cases are added. Will not affect expenditure.
Busta said that the Fed admitted that it has made some progress in achieving its goals, “it seems to be so that they can have an option, which is to announce an adjustment to the bond purchase plan as soon as September.”
The industry generally believes that the Fed did not issue clear guidance this time, and now the focus is now on the Jackson Hole annual central bank meeting in August. Reid, head of global fixed-income investment at the investment company BlackRock, said that the Fed is expected to begin to outline the reduction plan at the Jackson Hole meeting and will give more details at the September policy meeting.
Push a new mechanism to resolve market concerns
The Federal Reserve also announced the establishment of two standing repurchase agreement arrangements on the 28th, including domestic repurchase agreements (SFR) and repurchase agreement arrangements (FIMA) for foreign and international monetary authorities to support the effective implementation of monetary policy and the smooth operation of the market , To a certain extent to resolve the worries caused by the planned tightening of monetary policy.
The Federal Reserve stated that the domestic repurchase agreement came into effect on the 29th. The Federal Reserve said that this new tool will accept primary dealer institutions to exchange securities backed by U.S. Treasury bonds, agency debt and agency mortgage loans for a one-day cash loan at an interest rate of 0.25%. The Fed stated that the daily loan limit for the mechanism is US$500 billion. The Federal Reserve provides similar tools to foreign official agencies.
The Federal Reserve stated that in the future it will expand the scope of the permanent repurchase mechanism to banks that accept deposits. The mechanism for primary dealers will operate daily, while the mechanism for foreign central banks will operate as needed.
The American “Wall Street Journal” article stated that the establishment of such a permanent mechanism will reduce the possibility that the Fed will have to temporarily increase liquidity to the market through a repurchase agreement. These repurchases are in fact short-term cash loans provided to eligible financial companies, with U.S. Treasury bonds or mortgage bonds as collateral. In the past few years, the Fed had to carry out these repurchase operations to increase banking reserves and help overcome the first wave of market panic caused by the new crown epidemic.
After the announcement of the Fed’s statement, the key market indicator, the 10-year Treasury bond yield rose to a daily high of 1.278%, and then fell back to 1.228%.
The Bank of Korea said on the 29th that the Fed’s decision was in line with expectations and had limited impact on the global market.
Many countries are preparing to respond to the shift in U.S. monetary policy
As the U.S. economy has basically recovered to its pre-epidemic level, people from all walks of life are concerned about the timing of its austerity, and many central banks are preparing to adopt an early austerity policy to respond.
The Bank of England will announce its interest rate decision on August 5 and announce the minutes of the meeting. The bank may maintain its full-speed stimulus policy unchanged, but two decision-making officials said that due to accelerating inflation, the bond purchase plan of nearly 900 billion pounds (about 1.2 trillion US dollars) may have to end early.
In fact, since March this year, many emerging economies, including Russia and Turkey, have gradually tightened their monetary policies. Last Friday, Russia announced an interest rate hike of 100 basis points to 6.5%, which was the largest rate hike since the 2014 ruble crisis. Russia’s central bank governor Nabiulina has stated many times before that domestic inflationary pressures are not temporary. Looking ahead, the Central Bank of Russia predicts that this year’s inflation rate will be 5.7%-6.2%, which is far higher than the central bank’s target of 4%.
After the Federal Reserve’s interest rate meeting released last month’s attitude to study the scale of downsizing, Latin America’s Brazil, Mexico, and Chile successively announced their interest rate hike decisions. In addition to coping with inflationary pressures, preventing the Fed’s policy spillover effects in advance is also one of the considerations.
In 2013, the then Fed Chairman Ben Bernanke hinted that he would reduce debt purchases and triggered a “reduction panic.” Morgan Stanley analyst Lord Lord proposed the concept of the “fragile five countries”: emerging economies that account for 7% of the global economy Brazil, Indonesia, India, Turkey, and South Africa have been challenged by negative factors such as inflationary pressures, exchange rate overvaluations, and huge current account deficits, and their economic growth has slowed down. Take Indonesia as an example. At the beginning of 2014, the country’s current account deficit rate rose to 4.4% of gross domestic product (GDP), well above the 3% warning line, and the capital market fluctuated significantly.
Market participants predict that as many countries have begun or prepared in advance to respond to the Fed’s measures to shrink the balance sheet, the spillover effect of the US monetary policy shift will be limited.