At 2:00 am Beijing time on Thursday, the Federal Reserve released the minutes of its March meeting.
The Fed usually releases its minutes three weeks after the meeting-which looks a lot smaller than February's, with 12 pages (eight pages short), compared with February's 20-page minutes. However, the fewer words, the bigger the matter, and the signal revealed in this summary is bigger than the market expected.
First, the main points of the summary
On the Expression of Interest Rate
1) Many participants noted that one or more 50 basis point rate hikes might be appropriate at future meetings, especially if inflationary pressures continue to rise or intensify.
Interpretation: It is almost certain that the interest rate will be raised by 50 basis points in May. Originally, many officials preferred to raise interest rates by 50 basis points, but in view of the impact of the Russian-Ukrainian war, they finally decided to raise interest rates by only 25 basis points.
2) Participants felt that a rapid shift to neutrality in monetary policy stance was appropriate.
Interpretation: The implication is to quickly return to neutral interest rate, that is, to raise interest rate to 2.4%-2.5% during the year. The Fed has not tightened so much in a year since 1994: raising interest rates by 250 basis points a year. The last more aggressive rate hike was in the early 1980s when Volcker was at the helm of the Federal Reserve.
Note: Neutral interest rate is a theoretical level that neither stimulates nor curbs the economy. Fed officials expect neutral interest rate to be around 2.4%.
3) Officials also noted that a shift to a more austerity policy stance may be necessary in the future, depending on economic and financial developments.
Interpretation: A 50 basis point rate hike is already under consideration, and may be increased more than once. However, the Fed did not expect to raise interest rates by 50 basis points at every meeting (still keeping balance).
On the expression of reduced table
4) Officials "generally agree" that the monthly reduction ceiling is $95 billion, the monthly reduction ceiling of US Treasury bonds is $60 billion, and the reduction ceiling of mortgage-backed securities is $35 billion (thus reducing the annual reduction by about $1 trillion). Most participants believed that if market conditions allowed, it could be adjusted to the maximum limit of scale reduction in stages within three months or slightly longer. Some participants said they were satisfied with the relatively high monthly cap or no cap.
At present, the balance sheet of the Federal Reserve is as high as 8.9 trillion US dollars
Interpretation:
In this meeting minutes, one of the major events that everyone is paying attention to is "shrinking the table faster".
-The Federal Reserve listed the "detailed parameters" of the scale reduction, and the upper limit of the monthly scale reduction was close to the $100 billion expected by Wall Street.
-The pace of this scale reduction is twice as fast as that from 2017 to 2019. The maximum monthly reduction scale in the last scale reduction was 50 billion US dollars.
-The most important sentence in the minutes is "Start the table reduction after the meeting in May at the earliest".
Statement on Financial Market
5) Liquidity conditions in some financial markets became strained during the meeting. The deep deterioration in the US Treasury bonds, US equities and crude oil markets could lead to particularly large swings in Treasury bond yields and stock prices later in the meeting.
Interpretation: The Fed is nervous about the illiquid market, which often amplifies the volatility of prices. The pricing of the bond market is roughly in line with the Fed's track of "raising interest rates and shrinking the table" (bonds were sold off and yields soared after raising interest rates in March), but the US stock market definitely did not.
A statement about inflation
6) Some participants argued that a major risk for the Committee at this juncture was that inflation and inflation expectations could become entrenched if the public began to question the Committee's determination to adjust its policy stance.
Interpretation: This is why the Fed does not give up any occasion to express its determination to fight inflation, but rather expresses its "super hawkish views" bluntly. Lack of trust is what the Fed fears most.
Second, the market impact
This summary is more hawkish than the market expected, but the volatility of financial markets is limited.
US stock market fell, but fellThe range does not match the hawkish degree revealed in the minutes: the Dow Jones index fell 0.42%; The S&P 500 index fell 0.98%; The Nasdaq index fell 2.22%.
US bond yields are mixed, short-term bonds are basically flat, while long-term bonds are further sold off (the two-year US bond yields that move in sync with the expected increase in interest rates are basically flat)
The yield of 2-10-year US bonds is further away from upside-down, and the yield increase of 10-year US bonds (reported as 2.609%) is greater than that of 2-year US bonds (reported as 2.504%). I said before that the Federal Reserve will push up the yield of 10-year US bonds by shrinking the table to avoid upside-down.
Bitcoin fell back below $44,000
The dollar index rose to a high after the March meeting
Gold prices fell slightly
It is worth noting that there has been no significant change in the expectation of raising interest rates or cutting interest rates after the publication of the minutes-it is still expected to raise interest rates 9 times this year and cut interest rates 3-4 times next year.
Third, in addition to the minutes
The Fed spoke the harshest words and revealed all the signals that should be revealed.
Many people wonder why such a hawkish Fed didn't stir up market waves. The answer is-no big surprise. After reading the minutes of the meeting, people realized that this was not a real change of position. Compared with the minutes, the news a day ago is much more significant to investors and their psychology.
Brainerd, the governor of the Federal Reserve, said on Tuesday that she expected the Fed to quickly reduce the size of its balance sheet, and this process may begin in early May (Brainerd's words gave the market an early shot).
Looking back on a series of actions since the interest rate hike in March, I have to admire the governance level of the largest central bank in the world.
The Fed's deployment of troops is very learned:
First, let the market "hear" a sharp increase in interest rates
St. Louis Fed Chairman Brad was the first official to speak after the interest rate hike, making the most hawkish speech (saying the harshest words) and alerting the market-inclined to raise the interest rate by 50 basis points sharply and supporting raising the interest rate to 3%-which was still the view of the world at that time, but has now become the consensus expectation of the market. The first to let Brad speak in public is much more meaningful than others. He is recognized as a hawk. What he said will only make the market feel that this is an extreme view within the Federal Reserve and does not represent the Federal Reserve, so the market did not care (there was no panic) at first. However, the Fed's initial purpose is not to care whether the public believes it or not, but to present this view for the first time, and the market panic will be much less when it comes to other people for the second time.
Second, let the market "believe" in raising interest rates substantially
After Brad's speech, a series of Fed officials made remarks of "supporting a sharp increase in interest rates". In silence, the market consensus on a sharp increase in interest rates has formed.
Third, let the market "hear" the shrinking table
Before releasing the minutes of the March meeting, Brainard, a former moderate, was the first to talk about "shrinking the balance sheet". It is also just right. Brainerd is a prospective vice chairman of the Federal Reserve and has not appeared for a long time. The market will naturally attach importance to her words, but it will not attach great importance to them. Therefore, after her speech of "doves turning hawks", the decline of US stocks is still limited. Let Brainerd talk about shrinking the table the day before the meeting minutes. The interval is short, and the market hype time will not be very long.
By now, the Fed's tightening path has been clear, telling the market that it will take tough measures to fight inflation.
Every step of the Fed is gradual, a restrained step by step, which is a big chess game behind it.
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