It is generally expected that the Fed will raise interest rates in advance this year and start the table contraction. With the Fed tightening monetary policy significantly overweight, the global central banks may have been biased towards “hawks”.
The Fed began to raise interest rates as early as March?
According to the minutes of the meeting, almost all participants agreed that it might be appropriate to start reducing the balance sheet at some point after the first increase in the target range of the federal funds rate.
On January 6 local time, St. Louis Fed chairman Brad said that in order to deal with inflation, it is possible for the Federal Reserve to raise interest rates as soon as March and then follow up to reduce its balance sheet. In this way, inflation can be better controlled, and the subsequent pace of interest rate increase can be advanced or delayed according to the trend of inflation.
With regard to “shrinking the balance sheet”, Brad also said that with the end of the asset purchase plan in the next month, the next possible actions of the Federal Reserve include passively reducing its balance sheet in order to reduce the loose state of the money market at an appropriate speed.
As this year’s voting Committee, Brad also stressed that the focus of the Fed’s work now is to fight inflation. With the strong recovery of the real economy, but inflation is far higher than the policy target, the Fed’s monetary policy has also shifted to fighting inflation more directly.
In addition to raising interest rates and shrinking the table, Brad also gave positive expectations for the economic outlook of the United States. He believes that the growth rate of the US economy this year “will be higher than the long-term trend”. In addition, Brad is also bearish on the risk of Omicron variant, saying that the epidemic number in South Africa has peaked and declined, and it can be predicted that the United States will follow the same path.
On the same day, San Francisco Fed chairman Daley expressed support for ending the asset purchase plan faster and starting the table contraction after the Fed started the normalization of the federal fund interest rate.
According to the Fed’s regular policy operation process and combined with the historical experience in 2017, Guosheng securities expects that this round of Fed should also follow the path of “raising interest rates – giving a table reduction plan – starting table reduction and delaying interest rate increase – raising interest rates again”. In addition, in 2017, there was a six-month interval between the discussion of the reduction table and the final announcement, which can also be used as a reference.
Guosheng Securities believes that from the current situation, the most likely roadmap is: the first interest rate increase in May, the table reduction plan given in June or July, the table reduction implemented in September or the fourth quarter, and the second interest rate increase at the end of the year. It is expected that the interest rate will be increased only twice in the whole year, rather than three times implied in the dot matrix and interest rate futures. If the follow-up epidemic in the United States eases significantly, it is not ruled out that the first interest rate increase will be advanced to March, and the time of table reduction will be advanced accordingly, but the probability of raising interest rates three or more times a year is still not high.
In its previous report, CICC macro has advanced the time point of the first interest rate increase from the fourth quarter of 2022 to may, but at present, the agency does not rule out the possibility of further advance to March. The next interest rate meeting of the Federal Reserve is from January 26 to 27. If the Federal Reserve intends to raise interest rates in March, it will release a clearer signal at the interest rate meeting. According to the schedule, the next FOMC meeting of the Federal Reserve will be held from January 25 to 26.
The tide of global interest rate hikes is rising
The Bank of England has raised interest rates once after the Federal Reserve’s interest rate meeting in December 2021, and the Bank of New Zealand and South Korea have raised interest rates twice a year in 2021. Not only the time point of the Fed’s interest rate increase may be advanced to the first half of this year, with the continuous rise of inflationary pressure, the market expects that the path of interest rate increase by central banks will be clearer.
After the Federal Reserve released the minutes of its December meeting, the central banks of Latin America and the United States started raising interest rates after that. On January 5 local time, the Central Bank of Uruguay decided to increase the monetary policy interest rate by 75 basis points to 6.5%, and it is expected that the interest rate will continue to increase gradually until the inflation expectation is consistent with the target. The central bank’s Monetary Policy Committee expects inflation to continue to rise in most developed and emerging economies.
According to Bloomberg reported on January 6, the Argentine central bank raised the benchmark 7-day leliq (liquidity note) from 38% to 40%, which is also the first time that the Argentine central bank has raised the benchmark interest rate in more than a year. At present, the inflation rate in Argentina is as high as about 50%. On the same day, the Central Bank of Peru also announced that it would raise the policy interest rate by 50 basis points to 3%, which is the sixth consecutive month for the Central Bank of Peru to raise interest rates. “In view of the existing information, we think it is appropriate to continue to promote the normalization of monetary policy in the coming months,” the Central Bank of Peru said
Poland’s central bank raised interest rates on the eve of the release of the minutes of the Federal Reserve meeting. On January 4 local time, the Polish monetary policy committee announced its decision to increase the main interest rate of the central bank by 50 basis points to 2.25%, which will take effect on January 5. This is the fourth interest rate increase in Poland in four months. Therefore, the Polish central bank has become the first national bank to announce an interest rate increase in 2022.
Will inflation peak this year?
Under the epidemic, inflation in many parts of the world hit a new high.
According to the data of Eurostat, the non seasonally adjusted CPI annual rate of the euro zone in December 2021 reached 5%, which is expected to be 4.8%, with the previous value of 4.9%, a record high since the establishment of the EU in 1991. In November 2021, the consumer price index (CPI) of the United States increased by 0.8% month on month and 6.8% year-on-year, the largest year-on-year increase since June 1982. In November 2021, UK CPI rose by 5.1% year-on-year, reaching a new high in recent ten years.
Inflation in emerging economies is also not optimistic. With the rise of US inflation and nominal interest rate, the capital outflow and currency devaluation of high debt emerging economies will intensify, and the risk of debt crisis and currency crisis will further rise. According to the Turkish Bureau of statistics, inflation in Turkey increased by 36.08% year-on-year in December 2021, far exceeding expectations, the largest year-on-year increase in recent 20 years.
Kristina Hooper, chief global market strategist of Jingshun, believes that for the Fed, it still depends on the economic environment. It may end the reduction of asset purchases in advance, but whether it will raise interest rates depends on two factors: the first is inflation and the second is employment. At present, the United States is basically close to the state of full employment, so it is more concerned about inflation.
Jingshun believes that US inflation is expected to peak in mid-2022. The agency’s main consideration is the money supply. The growth of money supply in the United States has peaked and began to decline. There is a very direct link between the growth of money supply and inflation. Money supply can even be called the “catalyst” of inflation. As the economy gradually emerges from the epidemic, pent up demand will be released, and savings will begin to decline. In addition, after the supply chain is adjusted, inflation will slow down in the second half of this year.
Novel coronavirus pneumonia is no longer the biggest risk factor for economic recovery, according to the average infection and mortality rate of 7 days. From the current situation, although the new variant strain Omicron is more infectious, the severe rate is not high. Jingshun found that in the past two years, through vaccination or some new treatment methods developed, it can very effectively control the hospitalization rate and mortality. In terms of travel indicators, the new variants do not have much impact on travel. Most of the new strains affect people who have not been vaccinated. If the infection is not very serious, these people will generate antibodies and eventually form better immunity.
Therefore, Hooper said that 2022 is likely to be a transition period for European and American economies. In other words, various special support policies provided during the epidemic will gradually reduce and slow down in 2022, and the stimulus will gradually return to the normal level. The economic growth rate will be lower than that in 2021, the inflation level will also decline, and the economy will return to the normal level. The economic situation at the end of this year will certainly be more normal than that at the beginning of this year. In contrast, the vaccination rate in emerging markets is relatively low, and the economy has not been fully reopened as in developed countries in 2021. Therefore, for emerging markets, 2022 will be more like 2021 in developed markets, that is, gradually opening up the economy and accelerating growth.