I. The main content of the March FOMC meeting
March rate meeting still did not make any policy adjustments, the continuation of the dovish stance in line with expectations. Before the meeting, the market is generally concerned about 1) whether the Fed will show its willingness to intervene in the recent continued upward movement of U.S. bond rates and steepening of the yield curve; 2) how the Fed will revise economic expectations and dot plot; 3) how the Fed views the rapid repair of the economy at the moment, whether it will advance taper or raise interest rates, so asset prices are volatile before the meeting. And from the actual results: 1) the Fed short-term for the care of asset prices and the possibility of regulating U.S. bond rates is unlikely; 2) the Fed is more optimistic about the economy this year, the next year remains cautious; 3) even if the economy is optimistic, still to the market to continue the easing of expectations, the road to future tightening will return to data-dependent. It can be seen that although the Fed does not intend to aid the continued upward movement of U.S. debt rates, but the policy stance is still dovish, downplaying market concerns about policy shifts, the dollar, U.S. bonds fell after the rate meeting, U.S. stocks, gold rose.
Second, why the Fed does not intervene in the U.S. debt market?
We analyze why the Fed does not intervene in the U.S. bond market from the perspective of whether the Fed has the ability, the need, and the willingness to adjust the yield curve shape to control the long bond rates upward.
1, have the ability? The Fed’s policy toolbox is still adequate. The Fed currently has sufficient tools to adjust the shape of the yield curve, including distortionary operations OT, yield curve control YCC, quantitative easing QE, in addition to the extension of SLR exemption policy, enhance short-term interest rate corridor also has a certain effect. Taken together, compared with the Fed’s policy toolbox, SLR extension and the implementation of distortionary operations probability is greater. The quantitative easing policy will convey to the market an excessively loose monetary policy stance; YCC in the current economic repair prospects are more optimistic, inflation is expected to go higher in the background, the flexibility of short-term exit is poor; raise the interest rate corridor and easy to convey to the market expectations of interest rate hikes, the policy is too strong, so the three above-mentioned currently see the probability of launch are not large. OT operation if coupled with the release of TGA accounts bring short-end If the Fed does not plan to implement the YCC and other tools to directly regulate the long-end interest rate, the probability of extending the SLR is very high.
2. Necessary? Fiscal burden and financial stability is not an issue. For one thing, the fiscal burden of rising long-debt interest rates has not increased. 2020 U.S. Treasury interest payments fell to 1.6% of GDP, and this share will be even lower in 2021, which means that even if interest rates rise, the burden on the Treasury will not rise significantly in the short term. In addition, the rising interest rate period will raise the cost of debt issuance, but at the same time raise the tax base, the fiscal burden is not increased, but brings down the deficit rate. The second is that the rise in long term debt rates did not bring about a deterioration in the financial environment. financial conditions have tightened since February, but are still historically low; the household sector leverage ratio is still healthy; the corporate sector financing capacity is still strong; short-term financing market liquidity is still abundant, and spreads remain low, or can reflect the rise in long term debt rates did not bring about a deterioration in the financial environment.
3, there is the will? There is not a strong will of the Fed officials to take a stand. From the perspective of recent Fed officials’ statements, the Fed may not intend to control the long-end interest rate or yield curve shape at the moment. Fed Chairman Jerome Powell also dismissed questions from reporters about the implementation of operations such as OT in this rate meeting conference and said that the current monetary policy stance is appropriate.
So all things considered, the reason why the market still has greater expectations of the Fed is because the Fed still has a very ample supply of policy tools, and in the case of rapid upward movement of interest rates bringing about large fluctuations in asset prices, the market always expects the Fed to have a policy to take care of. But from an objective point of view, the Fed has no need or desire to adjust the level of interest rates, interest rates with the repair of economic fundamentals and upward does not increase the financial burden, nor will it bring financial stability impact; and the Fed’s monetary policy based on dual objectives will not simply be swayed by the financial markets. Therefore, we believe that for the Fed’s subsequent monetary policy still needs to return to economic fundamentals, but only from the asset price itself, the Fed may continue to give the market easing guidelines, but it is difficult to real easing policy.
U.S. bond rate outlook: the pivot may reach 2%, Q2/Q4 has the risk of punching higher. From the pricing of the economic fundamentals themselves, the rebound in U.S. bond rates to 2% has fundamental support. From the future rhythm of U.S. bond yields, Q2 by the impact of high inflation, Q4 by the impact of the risk of a potential policy shift by the Federal Reserve, both have the risk of a short-term rush higher interest rates.
Risk tips: U.S. vaccination progress than expected, the U.S. economy repair stronger than expected