Comments from all sides: The Fed’s May meeting on interest rates releases a dovish signal

In the early morning of Thursday, Beijing time, the Federal Reserve’s Monetary Policy Committee issued a May resolution, and the Fed decided to increase the U.S. federal funds rate by 0.5% (that is, an increase of 50 basis points) through the meeting to reduce the high inflation rate in the United States. After the rate hike, the federal funds rate range increased to 0.75% to 1%. It was also the first time the Fed raised rates by 0.5% in 22 years.

At the same time, as the biggest change in this resolution, the Federal Reserve officially announced that it will gradually shrink its balance sheet starting on June 1, and plans to gradually increase the scale to $95 billion per month in three months. Specifically, the initial scale of the Fed’s reduction of treasury bonds and MBS bonds is $30 billion and $17.5 billion, respectively, and will gradually increase to $60 billion and $35 billion in three months.

In addition, the Fed rate meeting released three very important signals:

1. Federal Reserve Chairman Powell said at a press conference after the interest rate decision that there is some evidence that the core PCE has peaked. A rate hike of 75 basis points is not worth considering, a 50 basis point hike is an option in the next few meetings, possibly a 25 basis point hike after a 50 basis point hike.

2. Bullard, a super hawk of the Fed, did not vote for a larger rate hike.

3. The Fed did not increase the size of the national debt reduction to the $60 billion cap during the refinancing month. The Fed was originally expected to hit the $60 billion cap on Treasury drawdowns in August to allow the Treasury Department to reinvest some of it during the refinancing month.

Obviously, Fed Chairman Powell’s words made the financial market collectively relieved: U.S. stocks took a rocket late in the session, gold approached the $1,890 mark, Bitcoin also broke through the $40,000 mark, and the entire crypto asset market also rose.

Michael Brown, director of market intelligence at Caxton, commented that the Fed raised interest rates by 50 basis points for the first time since 2000 as expected, and it is surprising that the super hawk Bullard did not vote for a larger rate hike; FOMC It also hinted that it will actively raise interest rates further, and reiterated its willingness to raise interest rates to a neutral level as soon as possible; but the market has already priced in a sharp interest rate hike, and the threshold for Fed hawks has always been high. So while the Fed’s decision itself was hawkish, it was a bit dovish compared to the market’s high expectations, triggering a rally in risk assets , leading to a weaker dollar, typical of buy expectations, sell facts, while also stimulating demand for U.S. Treasury bonds.

Guosheng Securities commented on the Fed’s May meeting on interest rates, saying that the Fed’s most hawkish moment may have passed . With the slowdown of the US economy and the fall in inflation, the hawkishness of the Fed is likely to weaken in the second half of the year, and the market’s interest rate hike expectations will also cool down. The round of rate hikes may stop early next year.

For others, however, this may be just a flash in the pan. There are fears that without tough measures, markets will face a vicious combination of persistently high inflation and slowing growth. Traders had increasingly said that “the FOMC will opt for a larger rate hike to quell the hottest inflation in decades, also raising the risk of pushing the economy toward a recession .”

Jeff Klingelhofer, co-chief investment officer at Thornburg Investment, said: “ I was surprised to see some dovish statements about inflation. In their hearts, the Fed still insists that inflation is temporary. If inflation concerns are so serious, they Rates could have been raised more aggressively. ” 

The Wall Street Journal analysis said: Although US stocks rebounded after Fed Chairman Powell made it clear that he did not “actively consider” raising interest rates by 75 basis points, the hawkish turn of the Fed in the past few months has formed a powerful combination of punches. On the one hand, the Fed’s aim to reduce an overheated economy could slow revenue growth and even shrink profits directly; on the other hand, higher interest rates have increased the attractiveness of fixed income products relative to the stock market. The S&P 500 has pulled back 10% this year, and as the Fed contracts further, the stock market will struggle.

To be sure, if the stock market falls too fast and too hard, the Fed is likely to shelve its tightening plans. Severe financial market distress would be seen as a huge economic risk that the Fed would not ignore. However, a larger stock market sell-off may be needed to stop the Fed’s tightening pace, as the S&P 500 fell by roughly 20% at the end of 2018, prompting the Fed to shelve plans to raise interest rates. The biggest difference from the situation in 2018 is that the worry was that inflation was too low, and now inflation is too high. In addition, wage growth was sluggish in 2018, and now wage growth pressures are building as the Fed aims to cool the job market.

Also, there’s a reason the Fed may think it can ignore the stock market’s decline. First, the recent decline in U.S. stocks still leaves valuations high compared to history. Therefore, further declines in the stock market may be seen as the release of a bubble in a high-priced market rather than a reflection of economic problems. The second point may be more important, the decline in equities may not lead to economic distress, as U.S. household balance sheets are in good shape and debt-to-income ratios are significantly lower than they were during the 2008-09 financial crisis. Corporate balance sheets also appear to be doing well, in part because many have locked in lower borrowing costs during the drastic rate cuts due to the coronavirus pandemic. In addition, the labor demand of enterprises is very strong, but the decline in stock prices may not dampen the labor demand of enterprises in the short term. The Fed won’t stop tightening until the economy cools, and stocks could experience more pain. 

Nick Mancini, head of research at crypto sentiment analysis platform Trade The Chain, said: “ Any guidance from the FOMC excluding a 75 basis point rate hike would be positive for both cryptocurrencies and stocks . We believe the market has already priced in further rate hikes in 2022. 25 bps and 50 bps expectations. This brings certainty to the market, which in turn triggers bullish price action. ”

Analyst @tedtalksmacro said the market had fully priced in the target range for a 50bps rate hike to 75-100bps ahead of the meeting , which is what the Fed is offering. Sell ​​rumors, buy news staged. He said the meeting was bullish for the bulls – BTC and U.S. stocks are heading for range highs. US stocks are set to bottom out in the next 2-3 weeks ahead of the June CPI data. At the same time, he pointed out that the Fed’s gradual shrinking of its balance sheet is a huge headwind for risk assets. Reduced market liquidity will make it difficult for risk assets to rebound sharply. Until inflation is proven to peak, we can expect markets to be range-bound rather than sustained outbursts.

Posted by:CoinYuppie,Reprinted with attribution to:
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