1, Feder Interest Rate Resolution: Officially enter the interest rate hike cycle, speed up the pace of currency tightening
Resolution Focus:
1. Raise the federal benchmark interest rate by 25 basis points from the range of 0%-0.25% to the range of 0.25%-0.50%;
2. The dot map implies that six interest rate hikes of the same scale will be carried out within the year;
3. " shrinking " will be announced as early as May, and the pace will be faster than the previous round of tightening;
4. The scale has been reduced this year's GDP forecast to 2.8%, compared with 4%. Adjust PCE and core PCE inflation expectations for the next three years.
Comment: The Federal Reserve raised interest rates by 25 basis points as scheduled, the bank's first rate hike since December 2018. And compared with previous meetings, this meeting sent more hawkish signals. The March dot chart shows that Fed officials expect to raise interest rates seven times in 2022, with interest rates of 1.9% by the end of 2022 and 2.8% by the end of 2023. Among them, 7 members believe that interest rates should be raised more than seven times, far exceeding market expectations. The dot chart implies that there are at least six rate hikes of the same scale (25bp) this year, much higher than the previous Fed. The previously announced US CPI rose 7.9% year-on-year, setting a new high in nearly 40 years, and the Russian-Ukrainian conflict caused further increase in the global price of commodity . The continued warming inflationary pressure has caused the Federal Reserve to accelerate the pace of currency tightening. In terms of employment and economic expectations, the FOMC monetary policy statement changed the wording of steady employment growth to strong growth. Federal Reserve Chairman Powell also said that labor demand is very strong and the problem of supply shortage remains severe. At the same time, he also said that the expectation of an economic growth rate of 2.8% is still a very strong expectation, and the impact of the conflict in Russia and Ukraine on the US economy is highly uncertain, but the possibility of an economic recession is not particularly high. However, the recent trend of narrowing and inverting the yield between the 10-year US bond yield and the 2-year and 5-year US bond yields, suggesting that the risk of an economic recession has increased.
Figure 1: U.S. 2, 5 and 10-year Treasury bond yield curve
Data source: wind
2. Rate hike landed US index surged and fell backward . Follow-up attention to the progress of negotiations between Russia and Ukraine
Since February, the expectation of the Federal Reserve's interest rate hike and conflict between Russia and Ukraine have boosted the US index to fluctuate and rise, and once hit a nearly two-year high of 99.41 on March 7. On March 9, Ukrainian Prime Minister Zelensky said that he knew that NATO would not accept Ukrainian , no longer had any worries about joining NATO, and agreed to negotiate with Russia on the issue of eastern Ukraine. Signs of easing in the situation in Russia and Ukraine have greatly boosted market risk appetite, with the US index plummeting 1.18% on the same day. On March 16, after the Federal Reserve's interest rate hike was implemented, the US index fell at a high level, falling 0.36% to 98.0175 on Thursday, falling for four consecutive days, hitting a new low since March 9. Although the Fed implies seven interest rate hikes this year, the previous trend of the U.S. index has included this. The Fed's policy at this meeting did not send out a signal that it was more hawkish than market expectations, so the dollar index rose and fell after the market digested the interest rate hike expectations.
Looking ahead to the future market, the progress of negotiations between Russia and Ukraine and the direction of monetary policies of central banks in various countries are the main factors that dominate the foreign exchange market. Although Ukraine previously stated that Russia and Ukraine were expected to reach an agreement, Russia stated on March 18 that the report on major progress in Ukraine's negotiations was "mistaken", coupled with the increase in sanctions against Russia (see Figure 3) and providing weapons assistance to Ukraine, so there are still uncertain factors in the Russian-Ukraine negotiations. In terms of monetary policy, the global commodity prices have risen due to the conflict between Russia and Ukraine, which has further heated up inflationary pressures in various countries. The major global , including the Federal Reserve, has accelerated the pace of monetary tightening. The Bank of England has raised interest rates three times in a row, and the European Central Bank has also sent out hawkish signals in an abnormal manner.Overall, the ease of tensions in Russia and Ukraine and the implementation of Fed interest rate hikes has caused the US index to fall at a high level, but the Federal Reserve's accelerated pace of currency tightening means that the US dollar liquidity is tightening, which will bring certain support to the US index. It is expected that the US dollar index will still fluctuate at a high level, and investors need to focus on the progress of the negotiations between Russia and Ukraine.
Chart 2 US dollar index trend chart
Source: wind
Chart 3 US and Europe sanctions against Russia and countermeasures of Russia
Source: Online public information
The above information is for reference only and is not recommended for entry into the market
5
