"I knew there would be no big news for a long time, but I didn't expect Powell to have a "pigeon" to reach no bottom!" A foreign exchange trader told the First Financial reporter.
Beijing time 22:00, Feder Chairman Powell delivered a speech during Jackson Hall seminar. Although it implied that the market had long expected that will shrink the balance sheet within the year (previously, there were concerns that it would be announced during the seminar), it repeatedly emphasized that inflation is temporary and its attitude is unambiguous. "If you are eager to tighten monetary policy due to temporary inflation fluctuations, it will do more harm than good (it will impact the economy and employment), because the main impact of monetary policy on inflation may lag behind for a year or longer."
U.S. stocks began to climb before Powell's speech. In fact, the market has expected that there will be no major news at the Jackson Hall seminar. As of 23:00 on August 27, Beijing time, the US dollar index further fell to 92.7, and the S&P 500 index 's increase expanded to 0.78%, breaking through 4504 points.
First Financial reporter previously reported that last week's FOMC meeting minutes showed that there were differences within the committee, and then the market ushered in mixed July data, with optimism (strong non-agricultural) and pessimism (dimmed consumer confidence data; the number of new coronavirus cases in the United States increased by 1 times). Against this background, if Powell does not release any signal that the balance sheet reduction timetable will be announced before the September or November meeting, the market will regard it as a dovish signal, because it is already a consensus to announce the balance sheet reduction within the year, and the key is whether it is September or after November.
also has a more optimistic view that it is unlikely to announce a reduction in the balance sheet before November. Jiasheng Group global research director Matt Weller told reporters that the reason is that the interest rate meeting on September 22 happened to expire with the expiration of several emergency unemployment relief measures implemented at the peak of the epidemic. The number of jobs in the United States is still 6 million less than before the epidemic, and labor market data is enough to keep the Federal Reserve still inactive. It is not possible to announce a reduction in QE until the interest rate meeting in November. "And the September meeting may be used to remind the market again that the formal notice of balance sheet reduction is coming. The Federal Reserve may hope to reduce the impact on the market." Now, this situation seems more promising.
It is worth mentioning that the weakness of the US dollar since the beginning of this week shows that market expectations for expansionary monetary policy and premature balance sheet shrinkage have been reduced, possibly due to uncertainty surrounding the spread of the Delta mutant virus. Not only the US dollar, WTI crude oil soared nearly 10% this week, and gold prices continued to rebound from the 1,679 low on August 9. On the daily chart, gold prices have risen above the 50 moving average, rushing towards the 200 moving average of 1810.
It is worth mentioning that although Powell is very dovish this time, there seems to be no differences in the announcement of a reduction in the balance sheet this year. This time, Powell's words also revealed his confidence in economic recovery. He said that as the number of vaccinated people increases, schools reopen and unemployment benefits gradually fade, some factors that hinder job seekers may be disappearing. Although the Delta variant virus is at risk in the short term, the economic outlook remains good and we are continuing to make progress towards achieving full employment. "Continue to make progress towards achieving full employment" is a key indicator for the Federal Reserve to determine whether the balance sheet is reduced.
Powell mentioned at the end of his speech, "Before the pandemic, we all saw the extraordinary benefits that a strong labor market can bring to society. Despite today's challenges, our labor market is constantly moving closer to the above situation (more prosperity). The employment and participation rates are high, wages are generally growing, and inflation is close to our price stability target."
If you want to ask Powell what to do next? The answer is simple - the balance sheet reduction was announced this year, but the rate hike of is still far away. Why does
have to shrink the table? The imminent "explosion" of US debt may also be one of the reasons. "Monetary policy cooperates with fiscal policy, and only in the case of fiscal overdraft will the currency be over-issued."Zhu Yanhua, an expert in the international business department of the head office of the Bank of Communications, told the First Financial reporter that the US government's debt ceiling is due at the end of July. The "credit card limit" given to the US government by the law is at most US$22 trillion in debt, but this scale was already out of stock in mid-2019. By July this year, the US government's debt has exceeded US$28 trillion, overdrawing 27% of the specified amount, and it is also equivalent to 125% of the current price of GDP in the U.S. at the end of the second quarter. Before the new debt ceiling is determined (maybe 1 Between 0 and November), the "credit card" was temporarily frozen and the total debt will no longer grow. During this period, if the Fed's QE speed remains unchanged, the Fed's share of government debt will continue to rise (currently the share of holdings is the highest in history), which has added another motivation for hawkish officials to support the start of balance sheet reduction as soon as possible.
In addition, taking advantage of the economic recovery, balance sheet reduction is the best window period this year. Once the economy turns down, the Fed will miss the golden opportunity to shrink the balance sheet, which is also the dilemma faced by many Asian central banks now.
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