To The Moon

The market reacted strongly after the FOMC meeting. Indeed, Powell's statement is the most "eagle" since taking the office.

More importantly (giving bears the chance to fight back), It is FEDs' uncertain follow-up policy makes the market frightened.

The market is not afraid of eagles or surprised(can be fixed in short time, such as "sell the fact"). But the most annoying thing is uncertainty.

There is almost no update information at this meeting. The market has priced-in raising interest rates, balance sheet runoff, and adjusting the assets holding. Although the Fed is responsible for a large part of the current awkward situation as they neglected inflation and misjudged in the second half of last year, the current is not being as expected.

As for now, What should we worry about??

An unexpected tightening.

What actions may have exceeded expectations?

1. Starting balance sheet runoff in advance;
2. Raising interest rate exceeds 25 basis points in one time;
3. Immediately process runoff in the first interest rate hike meeting;
4. The proportion of bonds assets has further increased;

In fact, the market is more worried about balance sheet runoff  than raising interest rates. In our previous article,"How the Fed Stings the Nerves of the Market"In, has been analyzed:

The impact of raising interest rates on the economy is more comprehensive, and  balance sheet runoff will affect market liquidity to a greater extent. For example, the stock market. In 2018, the Federal Reserve balance sheet runoff, and the S&P 500 index honestly became the biggest year of retracement since the financial crisis in 2008.

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So, what is the impact of the unexpected tightening policy on the market?

• Accelerate the reduction of market liquidity,That is to say, there is no money that could have been used to increase positions and bargain-hunting, or positions that did not need to be sold should also be sold.
• More intense uncertainties,That is to say, the market is always worried about what the next action will be and when it will come, so that "holding money" is greater than "holding positions"
• Give the market a sense of frustration that "the Fed can't control the situation".This is very important. Once the market thinks that the Fed's actions can't solve the problem, it is an economic crisis. See 2008.

Attachment: Comparison of Policy Statements of Federal Reserve Meetings in December and January:

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