This week, the Federal Reserve announced the results of the interest rate resolution, and decided to raise interest rate by 275 basis points to raise benchmark interest rate to the range of 3%-3.25%, and the interest rate level rose to a new high since 2008. Regarding the Summary of Economic Expectations (SEP), the PCE inflation and core PCE inflation expectations for the next three years were raised, and the GDP growth forecast for the next three years were lower, of which the GDP growth forecast for the next three years was 0.2%. Raise federal funds rate expectations from 2022 to 2024.
dot chart is expected to be the Fed to cut interest rates in 2024
2023 median expected federal funds rate 4.6% (June expected 3.8%)
2024 median expected federal funds rate 3.9% (June expected 3.4%)
this year's median expected federal funds rate 4.4%
economic expectations Economic growth rate lowers, unemployment expectations rise,
0 sharply down, GDP economic growth rate this year and next two years, raising inflation expectations from 2022 to 2024
After the meeting press conference
Federal Chairman Powell reiterated that he will be committed to reducing inflation and is adjusting the policy to a level that is sufficient to limit economic growth. The rate of interest rate hike depends on future data. Historical experience reminds us not to cut interest rates too early; interest rate hikes may be raised by 100-125 basis points this year. Current inflation expectations are well controlled, and the job market is slowing down, but it is still imbalanced, and said the Fed will not consider selling housing mortgage-backed securities (MBS) in the short term. Since September, the Federal Reserve has accelerated the reduction of balance sheet , reducing 60 billion US bonds and 35 billion MBS per month. The insufficient maturity of treasury bonds will be compensated by short-term treasury bonds (T-bill).
The current market liquidity is still abundant. Overnight reverse repurchase can effectively buffer tightening
Feder overnight reverse repurchase (ON RRP) Since the unlimited currency easing has been implemented, the market has begun to experience excess idle funds. In order to effectively anchor the interest rate to fall within the FFR (Federal interest rate effective range), the Fed effectively acts as the interest rate lower limit through the overnight reverse repurchase (ON RRP). Since not all institutions can enjoy IOER (excess reserve rate), such as Federal Residential Lending Bank (FHLBS) and Government Supporting Organizations (GSE), overnight reverse repurchases effectively absorb excess funds in the market.
As of yesterday, the Federal Reserve's overnight reverse repurchase tool (ON RRP) has accepted 102 participants and absorbed $2.359 trillion in funds, setting a record high in recent years. Fed monetary policy tightening (QT) investors can pay attention to the scale of overnight reverse repurchase (ON RRP) usage and the decline in bank reserves to determine whether the current market liquidity is still in the easing stage.
Overall, Bank of America deposit reserves are still at a high level before the outbreak of the epidemic. Then once the market liquidity tightens, banks in the United States will inevitably start to scramble for funds, but there is still no increase in deposit interest rates.
The Federal Reserve continues to tighten its monetary policy, and pessimism reveals the light of the dawn
Although the Federal Reserve still has more than 100 basis points of interest rate hike space this year, and it may even raise interest rates by 25 basis points next year in 2023, according to the interest rate forecast dot chart, there are many Fed officials who expect that the interest rate hike cycle will end in 2024 and usher in a rate cut, and may lower interest rates year by year. In addition, the current liquidity is still quite abundant and has not yet formed a large liquidity.
Author: Teacher Wu Long
