The Fed’s April rate meeting continues to maintain a dovish policy tone. We believe that the current economic data is not enough to support the Fed’s marginal tightening, Tapering signal release point at the earliest or in the second half of the year. Maintain the judgment of “U.S. bond yields upward slowdown, the dollar index Q2-Q3 weakness.
▌ Federal Reserve meeting in April to maintain the benchmark interest rate and QE purchases unchanged. Interest rates, the FOMC meeting to maintain the federal funds target rate at 0-0.25% unchanged. In terms of asset purchases, the meeting maintained QE purchases of at least $120 billion / month unchanged (80 billion Treasuries + 40 billion MBS).
▌ Overall, the meeting the Fed maintained a dovish policy tone, on the one hand, recognizing the positive changes in the economy, but on the other hand, still believe that the current dual objectives of the Fed “inflation and employment” there is still a distance, the policy needs to continue to maintain loose.
(1) acknowledged that the U.S. economy has seen some positive changes: the post-meeting statement added the expression “U.S. economic activity and employment has increased”, and the March “economic risks (considerably risks)” was changed to “Risks remain”, and stressed that U.S. consumer spending on goods has grown steadily, the housing market has fully recovered, and manufacturing investment and production is increasing. At the same time, the U.S. services sector, which was most significantly affected by the outbreak, also showed marginal improvement.
(2) But reiterated that the rise in U.S. inflation is temporary and the recovery of employment is still some distance away: In the statement, the Fed continued to respond to market concerns about inflation, reiterating that price increases in the U.S. are only “temporary”, after which inflation will slow down and temporary price increases are unlikely to bring sustained inflationary pressures. On the employment front, Powell stressed that the current unemployment rate is as high as 6%, and the employment participation rate is significantly lower than before the outbreak, so there is still a long way to go for the job market to recover. Therefore, the Fed still believes that there is still a distance to achieve the current inflation and employment targets, and policy needs to continue to maintain accommodative.
▌ Current economic data is not enough to support the Fed’s marginal tightening, Tapering signal release point at the earliest or in the second half of the year. Powell mentioned in the post-meeting press conference that the trigger condition for Tapering is greater progress in the U.S. economy (Substantial further progress), relative to the rate hike condition – “substantial progress in inflation and employment ” for a lower threshold. According to the current vaccination schedule, the U.S. is close to the point of “universal immunization” in the third quarter may become the next point for the Fed to release marginal tightening signals. We expect that during the year in August-September the Fed will gradually release to the market the expectations of the future reduction of QE, Q4 announced details of the plan, the end of the year or early next year to implement, is expected to 6-12 months after the completion of the reduction, through the maturity of the bond reinvestment to maintain the balance sheet size unchanged for a period of time, and then to the beginning of 2023 to consider the matter of interest rate increases.
▌ Maintain the judgment of “U.S. bond yields upward slowdown, the dollar index Q2-Q3 tend to weaken”. Previously, the sharp rise in U.S. bond rates to a certain extent reflects the market’s concerns about the Fed’s monetary policy. As the probability of the U.S. economy overheating and inflation rising sharply this year is low, the concern of liquidity tightening will gradually ease and the upward slope of U.S. bond yields will slow down. We maintain our view in the “Overseas Liquidity Watch Series – Reasons for Recent U.S. Bond Volatility and Market Outlook” (20210317) that the economic recovery is expected to push the 10-year U.S. bond rate trend upward to about 1.8% throughout the year, and that the short-term market overreaction to the liquidity inflection point is facing a correction and the upward slope of U.S. bonds will moderate. As for the U.S. dollar, with the acceleration of vaccination and economic recovery in Europe, the synchronized global economic recovery is expected to drive the U.S. dollar index in Q2-Q3 marginal weakening.