Beijing time in the early morning of April 29, the much-anticipated Federal Reserve April FOMC meeting came to an end. As expected by the market, the Fed pressed ahead with the meeting, keeping the benchmark interest rate unchanged at 0-0.25% and the size of the $120 billion bond purchase unchanged.
The policy statement showed that “U.S. economic activity and employment indicators strengthened thanks to strong policy support and progress in vaccination against the new crown. The sectors of the economy most affected by the new crown epidemic remain weak, but have improved. U.S. inflation has risen, but mainly due to temporary factors.”
The Fed softened its previous statement that the outbreak posed “considerable risks” with “the economic outlook remains risky,” a major difference from this meeting compared to the March meeting.
Fed Chairman Jerome Powell’s “doves” sounded the same at the press conference, but the mention of “some bubbles in the capital markets” caused short term volatility in financial markets.
Overall, the meeting was in line with market expectations and did not bring a big impact to the market. This is due to the Fed’s clear forward guidance since the beginning of the year – “data-dependent” and good communication with the market.
At this meeting, Powell further clarified: “QE tapering does not require the full realization of the target, but needs to make ‘substantial progress’, which is not yet considered ‘substantial progress’; and rate hikes will have to wait until the target is fully achieved after.” This means that the Fed will not rush to scale back QE in the short term, and interest rate hikes are more distant, which in turn eases market concerns about policy shifts.
However, it is foreseeable that, as time goes by, the U.S. economy continues to recover, the clockwork of monetary policy normalization will be tighter and tighter, and the nerves of the market will become more and more sensitive, the world is waiting for the Fed boots on the ground.
Accelerating economic recovery Inflation is not yet enough to fear
Thanks to the increase in the number of vaccinations in the United States and the support of positive fiscal and monetary policies, the U.S. economic recovery is becoming stronger.
The latest edition of the Federal Reserve’s Brown Book on the economic situation released in mid-April showed that from late February to early April, U.S. economic activity accelerated to moderate growth and consumer spending strengthened.
According to the Brown Book, non-financial services generally improved; manufacturing did not contract due to widespread supply chain disruptions, but showed further expansion; on the credit side, overall lending conditions showed modest to moderate growth.
On the employment side, the April Brownbook was more positive compared to the March report’s description of the slow recovery in the job market. This was also evident from the March nonfarm payrolls released in early April. The data showed that employment rose by 916,000 in March, far exceeding expectations of an increase of 660,000. Initial jobless claims also fell back below 600,000 for the second consecutive week, a new low since last year’s epidemic.
Overall, the U.S. economy has emerged from the deep hole of 31.4% decline in the second quarter of last year, showing a V-shaped rebound. The latest U.S. GDP growth of 6.4% in the first quarter also showed stronger numbers. Most economists, including members of the Federal Reserve, expect the full-year U.S. economy to reach its best level since at least 1984. Currently, the U.S. academic and political classes are optimistic about the U.S. economic recovery.
The Federal Reserve’s policy statement released yesterday also confirms this situation. The statement showed that U.S. economic activity and employment indicators have strengthened thanks to strong policy support and progress in vaccination against the new crown. The sectors of the economy most affected by the new crown epidemic remain weak, but have improved.
This year, the U.S. inflation level has been rising rapidly. mid-April, the U.S. released the March quarterly CPI rate of 0.6%, higher than market expectations (0.5%), the data hit a new high in July last year. April 28, the U.S. 10-year inflation-protected Treasury bonds (TIPS) loss and gain balance inflation rate rose to 2.4%, a record high of nearly eight years. As the rise in Treasury yields at the beginning of the year has made many investors psychologically vulnerable, the market was once worried about inflation.
But for the inflation problem, the Federal Reserve attitude is calm. Powell said at a press conference, “Inflation is rising mainly reflects temporary factors.”
In this regard, there are two different voices in the market.
In the “new debt king”, DoubleLine Capital (DoubleLine Capital) CEO Jeffrey Gundlach (Jeffrey Gundlach), it is impossible to determine whether the U.S. inflation will be like the Fed economists say that only ” temporary”. Gundlach believes that the Fed may have underestimated the impact of the big monetary policy release.
Sun Mingchun, a member of the China Financial Forty Forum (CF40) and chief economist at Haitong International, agrees with the Fed’s judgment. In an interview with CF40 Research, he analyzed that “the rise in the level of inflation in the U.S. is influenced by the low base on the one hand, and on the other hand, by short-term factors such as the rebound in commodity prices and the rise in the prices of imported goods.” And both of these aspects are unsustainable factors.
”In the medium to long term, U.S. inflation has been at a low level, which has deep-seated structural reasons behind it: the U.S. economy is dominated by the service industry, and the most important cost driving up service prices is labor costs, and the lack of rising labor costs will have a long-term suppressive effect on U.S. inflation.” Sun Mingchun said.
Powell believes that some current inflation expectations indicators are only back to the levels of 2014 and 2018, which is not enough to prove the sustainability of inflation. But he also said that “if inflation is consistently and materially above 2 percent, then the Fed will use tools to reduce inflation.”
Employment becomes a central concern
Since the 2008 financial crisis, achieving full employment to maintain price stability has been treated equally as a dual objective of the Fed’s monetary policy. But before the outbreak of the new crown epidemic, inflation became a core concern for the Fed as the job market continued to perform steadily after recovering from the last round of the financial crisis, while inflation was slow to rise to the target level of 2%. Powell said at the December 2019 meeting that “it is unhealthy for inflation to remain below 2%, and we are strongly committed to achieving the 2% inflation target.
However, the epidemic has changed things. Right now, compared to the issue of inflation “calm”, the Fed is more worried about employment.
Although the recovery of the job market since this year is evident to all, but in general, the overall employment rate of the United States is still a gap from the high level before the epidemic, there are about 8 million adults in the public health event lost jobs.
Powell is concerned that the epidemic has left permanent scars on the job market. He said, “The March nonfarm payrolls report had a pleasing increase in employment, but that was far from enough and it may take several months to restore the balance between labor supply and demand.”
The uneven labor market recovery is also a serious problem: service sector workers are having trouble finding jobs; there are disparities between black and white unemployment rates; and minorities, women and workers in industries such as leisure and hospitality are not faring as well as other populations. From this perspective, there is still room for improvement in the U.S. labor market.
This will provide support for the Fed to remain patient in its policy stance in the near term.
What is substantial progress?
Relative to the March meeting, two adjustments were made in this Fed policy statement: an upward revision to the economic assessment and an acknowledgement of recent price developments. These adjustments reflect two recent changes: strong economic data and rising prices. But the Fed did not mention any hint of policy changes, but only retained the condition of “substantial progress” to adjust policy.
But what is substantial progress, is a matter of opinion. Powell’s speech may provide us with some clues.
The first is the progress of the epidemic. Powell said, “The path of the economy will depend in large part on the course of the epidemic, including progress on vaccinations. This still raging public health crisis will continue to weigh on economic activity and pose a risk to the economic outlook.”
St. Louis Fed President Bullard previously judged that the crisis of the epidemic will end only after at least three-quarters of the country’s population has been vaccinated, which will also be a necessary condition for the Fed to discuss reducing the scale of debt purchases.
Sun Myung-chun believes that it is necessary to pay attention not only to the domestic epidemic in the United States, but also to the development of the epidemic in India and Europe. Because there is an inextricable link between the three places, the residents’ commuting can have a new impact on the epidemic situation in the U.S. and Europe, and perhaps a new epidemic will appear one to two months later, which are subject to great uncertainty and deserve attention.
The second is employment. Powell said in a speech in early April that he would like to see consecutive months of job gains similar to those seen (in March) “so that we can really start to make progress toward achieving our goals.”
”Subject to the labor market, rising levels of inflation in the United States are not sustainable. So I think that by ‘substantial change’ Powell should be referring to the labor market.” believes that at the current pace, the U.S. labor market may need another seven or eight months to return to the so-called “full employment” level, in this process, the Fed should not rush to adjust policy.
When to return to normalization?
Although the April meeting of the Federal Reserve did not mention tapering of bond purchases and interest rate hikes, but along with the continued recovery of the U.S. economy, the policy exit is expected to heat up day by day.
Review the last round of U.S. monetary policy withdrawal process, from May 2013 Bernanke first mentioned the tapering of bond purchases, to December of that year, the formal withdrawal, which lasted about 7 months, compared to the current rate of improvement of economic indicators will be significantly faster than in 2013, and inflation will continue to be higher than the traditional target of 2%. The current round of quantitative easing policy is expected to exit faster than the same period in 2013, and does not rule out the possibility of starting to exit in the fourth quarter.
It is expected that the United States and some European countries may achieve universal immunity around this summer, this point may be the starting point for further improvement in the U.S. economy and the Federal Reserve to start releasing signals for the withdrawal of quantitative easing.
Bloomberg survey of a number of economists is basically consistent with the above judgment, they expect that, along with the strong recovery in the U.S. economy, the Fed will announce a gradual reduction in the size of the $ 120 billion monthly asset purchases in the fourth quarter of this year, Goldman Sachs also holds a similar view that the Fed will begin to hint at tapering debt purchases in the second half of this year.
The research team’s analysis model shows that the U.S. core CPI will remain on the rise until at least May 2022, especially from September this year, the U.S. core CPI may see a sustained linear rise to 2.7%-2.8% in May and June of 2022. But even if this round of rising inflation causes the U.S. core CPI to reach a level close to 3%, it is not very outrageous, because according to the Fed’s average inflation target, core inflation is above 2% for a longer period of time before it takes action. Therefore, from the current point of view, the Fed’s policy tone should still not change.
However, if the core CPI does rise sharply in the second half of this year, and accompanied by a relatively rapid decline in the unemployment rate, he expects that “the Fed may make changes in the policy tone earlier, or at least may reveal some subtle changes in the tone and stance.”
In any case, it is foreseeable that the downward pressure on this high hanging sword for the financial markets will grow.