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“The beginning of the transition phase”. Investors respond less to the Fed


The Federal Reserve has been warning for months that the extremely loose monetary regime due to its epidemic is visible. The virus was still standing, recovery was extremely fragile, uncertainty reigned.

On Wednesday, on the horizon, suddenly appeared the moment when the Fed could begin to stop support.

Ay ա Powell և his US Federal Reserve officials adopted a much more optimistic view of America’s return – և then laid the groundwork for tighter policy,

Not only did the Fed begin negotiations to cut its $ 120 billion-a-month asset purchase plan, but US Federal Reserve officials’ economic forecasts show that most now expect a two-tier interest rate hike in 2023, a year ahead of just three forecasts. months ago.

“There’s been a sharp shift in the Fed’s approach to managing recovery here,” said Tim Duy, an economist at SGH Macro Advisors and the University of Oregon. “The weight of evidence that the economy is recovering faster than expected, more inflationary pressures than expected, finally broke the Fed’s unpleasant stance.”

During his press conference, Powell tried to explain the changing views among his colleagues. “Many of the participants are more comfortable with meeting the economic conditions in the committee’s leading guidelines sooner than expected. And that would be a welcome development. “

According to Fed forecasts, Fed officials predict that the US economy will grow by 7% this year and by 3.3% in 2022, and the unemployment rate will fall to 5.8% from 5.8 at the end of next year. cents in May. But they are faithful to their view that the economy will not overheat. Major inflation will rise to 3% this year, but will fall to 2.1% in 2022 և 2023, a scenario the Fed will see with a full recovery.

The outcry from the Biden administration caused outrage, which it described as evidence that its economic policies, including the fiscal stimulus, were working. “It is a reaffirmation of the effort to be bold, to be resolute, to act on a large scale,” a White House official told the Financial Times.

But some investors were uncertain.

“The big picture here is that this is the beginning of a transition from a truly accommodative monetary policy to one that will be a less accommodative monetary policy,” said Michael Collins, senior portfolio manager at PGIM Fixed Income. “We will start reducing, then there will be some interest rates, I think the market is having a hard time adjusting to that. It will lead to a little more instability. “

The shift in the Fed’s so-called point interest rate forecasts is certainly shocked $ 21tn government bond market. Treasuries of all repayment terms were sharply sold after the issue, leading to an increase in profitability.

The 10-year benchmark yield rose 0.08 percentage points to 1.55% before adjusting for some of those losses on Thursday. The five-year banknote sold about 0.12 percentage points higher at 0.895 percent, and has since recovered little space.

The yield on the two-year banknote, which is even more sensitive to the Federation’s interest rate growth schedule, has fluctuated slightly this year and jumped to around 0.2 percent.

The Fed’s indication that there could be two interest rate hikes on the cards in 2023 was “surprising,” said Michael Stritch, chief investment officer at BMO Wealth Management, although some market expectations had already suggested such a change.

“One would be enough. “Both are exclamations,” Stritch said, noting that the number of Fed officials taking action next year was already higher than in March, even if they were still a minority.

“It simply came to our notice then. “It is impossible to imagine that a 2022 rate hike could play out.”

Updated feeding point gif for June 16th meeting

He was also surprised by Roberto Perley of Cornerstone Macro, who said that Federold “blinked” by turning his back on his vow to change policy only based on clear economic improvements.

“One step would not surprise us much, but two are really a big step for a commission that has so far stubbornly backed down on its new framework, deliberately not wanting to anticipate changes in forecasts,” Perley wrote in a note.

During the press conference, Powell tried to find out the ideas about the schedule with the rapid pace of dram tightening. Saying that the point chart should be taken with a “grain of salt”, there are still risks from the virus և any political change to happen step by step.

The Fed has promised to continue buying securities secured by Treasury և agencies at a rate of $ 120 billion a month until it sees “significant further progress” toward its goal of a more comprehensive recovery. Only later would it raise interest rates after certain economic milestones.

“The focus of the committee is on the current state of the economy, but in terms of our tools, it refers to the purchase of assets that we are thinking about. Upgrade: [in interest rates] “It’s good for the future,” Powell said. “It’s great to see progress, but I would not have declared victory once.”

A change of position may help to dispel some economists’ criticism that the FD is taking a risk behind the curve in policy-making, which may mean it will have to brake in the future.

“If the Fed sat here and said there was nothing to see here, we would not worry at all. [about inflation]”I think their credibility is starting to be called into question,” said Lisa Hornby, asset manager at Schroeders, a US multi-apartment fixed income firm.

“We can not continue to live in a world where the Fed has zero interest rates և $ 120 billion goes [government] monthly securities, և we have a very strong growth prospect. “



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