Just look at Powell’s mouth?… The three most notable things of the US FOMC

The anxiety that smears in the financial market does not disappear. The US 10-year Treasury bond rate surpassed 1.6% again on the 16th (local time) and the New York stock market shook again. Both the Dow Jones (-0.39%) and S&P (-0.16%) fell. Only the NASDAQ (0.09%) rose a little.

All eyes are on Washington. This is because of the Federal Open Market Committee (FOMC) meeting held at the headquarters of the Federal Reserve (Fed) Washington on that day. Attention is drawn to the FOMC data to be released after the meeting on the 17th and the press conference by Fed Chair Jerome Powell.

As of now, Powell and the Fed are unlikely to make surprising announcements. The Wall Street Journal (WSJ) predicted, “The Fed will say that the economic outlook has improved, but it will emphasize that it is too early to change interest rates or bond buying plans.”

Nevertheless, the market is ready to find anything. It is because the US economic recovery is likely to be faster than expected. This means that the Fed has less justification for stimulating the economy. This is why the FOMC is regarded as a place to find clues as to when the Fed will change the direction of the currency. In the announcement on the 17th, I picked three key elements to look at in order to know the Fed’s’instinct’.

In this FOMC, the Fed is expected to maintain a policy to purchase’zero interest rates’ and $120 billion of U.S. government bonds and mortgage securities (MBS) per month.

The most important thing in this situation is the dot plot. The dotplot is the forecast of the standard interest rate that the FOMC members revealed anonymously. In the FOMC in December of last year, only 5 out of 17 people predicted a ‘2023 increase’, and only one expected a ‘2022 increase’. It is said that the majority opinion of the FOMC was that the zero interest rate should be maintained until 2023.

If there is an increase in opinions on raising the base rate in 2022 or 2023 from December last year, it can be interpreted that the Fed’s willingness to ease the currency has declined.

The market’s thinking is already ahead of the Fed. In the case of 41 economists surveyed by Bloomberg, a majority of opinions predicted that the benchmark interest rate would rise twice in 2023. Rick Leader Blackrock Global Bond Chief Investment Officer (CIO) predicted to CNBC that “the Fed could taper (reduce bond purchases) in September or December.”

The US economic growth rate predicted by the Fed in December of last year is 4.2%. The situation where the power of the spread of Corona 19 was still reflected was reflected. The Organization for Economic Cooperation and Development (OECD) forecast was also 3.2%.

However, things have changed this year. The $1.9 trillion economic stimulus plan is being implemented, and the Corona 19 vaccine is rapidly spreading. There is even an expectation that the US growth rate can outpace China. Morgan Stanley (7.3%) and others forecast the US economic growth rate to be around 7% this year. The OECD also revised the US economic growth rate to 6.5% from its March forecast.

The Fed is also likely to raise its growth rate forecast this time. Along with this, the unemployment rate and inflation rate forecasts that are announced can be more positive than in the past. As such, the cause of the Fed’s monetary easing will inevitably decrease.

Measures and remarks on rising US long-term Treasury yields should also be looked at. The US 10-year Treasury Bond yield, which was below 1% until last year, is currently in the 1.5-1.6% range. Soaring government bond yields fuel fears of inflation.

For now, weight is placed on the prospect that the Fed will not take any tangible action right away. However, just mentioning the possibility of an increase in the excess reserve reserve rate (IOER), which is the interest provided by commercial banks on money deposited in the Fed, and the possibility of an operation twist (selling short-term bonds and buying long-term bonds, lowering the long-term interest rate) can stimulate the market.

In particular, measures to ease regulations on the’Complementary Leverage Ratio’ (SLR) introduced in April of last year to increase government bond purchases by large US banks are expected to end at the end of this month. In this way, interest rates can rise by selling and selling U.S. government bonds held by the drawing bank.

The market is betting a little more on inflation. Bill Gross Pimco, co-founder of’Aid Bond King’ told Bloomberg, “The US consumer inflation rate will rise to 3-4% in a few months, and the Fed will have to stop the current stimulus policy.” They have been selling US Treasury bonds a week ago,” he said.

Reporter Seungho Lee [email protected]