Mayor convinced by Kim Hyun-seok’s Wall Street Now Super Pigeon Powell… But

The Dow index crossed the 33,000 line for the first time in history, and the Nasdaq index, which remained in the negative area throughout the morning, turned up 0.6%. The 10-year Treasury bond rate fell to 1.61% per year, and the dollar index plunged by 0.5%. Bitcoin and gold also rose.

This is the appearance of the New York financial market as the Fed Chairman Jerome Powell finishes the press conference at 3:30 pm on the 17th (local time).

It was very different from the situation where everyone was anxious this morning, as the 10-year Treasury bond interest rate soared to 1.68% per year, the highest in 14 months before the opening this morning. In March, the Federal Open Markets Commission (FOMC) alleviated market unrest.

To sum up Chairman Powell’s remarks, “The outlook for the US economy is improving, but we want to see real progress, not outlook. Now is not the time to discuss taper.” He said that even if the economic outlook improves, the policy will continue to easing until the actual data confirms it.

A Wall Street official said, “Chairman Powell persuaded the mayor who was suspicious of’the Fed will tighten soon’,” and said, “It was common for the market to shake and rebound the next day every press conference, but today it was definitely different.” . On Wall Street, it was rated as “the best mitigating Fed (Ultra uber dovish)”.

The Fed’s Monetary Policy Statement, released at 2pm, remained unchanged as expected. It was a remarkable level to evaluate the economic situation, saying, “Recently, economic indicators and employment conditions have improved.” The phrase “We will keep the existing easing monetary policy until the target (full employment, 2% inflation) is reached. We will keep the existing asset purchase until there is significant progress in the target.” Of course, the standard interest rate was kept at zero.

Interest was also focused on the dotplot. The question was,’Would the median value of the committee’s standard interest rate estimates rise in 2023? With 18 members participating in drawing up the dot plot, the number of predictors for 2022 increases from 1 to 4 in December, and the number of forecasters for 2023 increases from 5 to 7. However, the median value was 0.1% until 2023, unchanged from the previous one. This confirms the Fed’s existing position to maintain zero interest rates by 2023.

As expected, the Fed’s economic outlook (SEP) has been revised up from its December forecast. The expected growth rate of GDP in 2022 has risen from 4.2% per year to 6.5% per year, and the inflation rate has risen from 1.8% in 2022 to 2.4%, but is expected to drop back to 2.0% in 2023. The unemployment rate is expected to drop to 4.5% in 2022 and 3.9% in 2023.

Investors soon focused on the press conference held at 2:30. “With growth soaring to 6.5% this year and prices rising by more than 2%, what will Powell say about the Fed maintaining its current easing policy?” was the key.

① Not when discussing the start of taper

“It’s not yet the time to debate when to start tapping. The US economy is still far from the Fed’s employment and inflation targets. Significant further progress will take time.”

“If we’re on the path to thinking about tapering, we’ll give it a signal.”

② Policies change only when we see actual progress, not outlook

“Thanks to advances in vaccine dissemination and fiscal stimulus, we expect to see faster progress in employment and inflation over time this year. We expect that to happen, but we have to see if that happens first.”

“We’ve given enough clear guidance on rate hikes. To meet that criterion, we have to see real progress, not progress in the outlook. I’m not going to act proactively based on the outlook.”

③ We are not concerned about market interest rate rise

“I don’t see a specific rate of return. It’s important that financial market conditions remain relaxed, and that’s what it is. If the disorder in the market becomes clear or if financial market conditions continue to tighten, we will be concerned. But interest rates trigger such a situation. I don’t see it as an impending catalyst.”

(When Powell, who responded leisurely, answered this, he saw and read the manuscript written in advance during the press conference that day.)

④ Inflation will increase, but it will be temporary

“Inflation is expected to rise this year due to the low base effect of early pandemic inflation in early 2020. Inflation is expected to rise in March and April. But that alone is not enough to change policy. The Fed is completely And is seeking inflation of 2% or more over a period of time if it helps to achieve sufficient employment.
A temporary inflation rise of more than 2%, which is likely to occur this year, will not meet our policy-changing criteria.”

“Temporary inflation should be distinguished from system inflation. The key is that the long-term interest rate outlook (of the Fed members) is tied at 2%. Most members will not see a rate increase until 2023.”

⑤ The dotplot is not the official Fed forecast

“The economic outlook (SEP) is not the Fed’s committee outlook. It’s just a collection of personal outlooks from several members. I don’t try to read too much on the dotplot.”

“Each member of the committee has their own opinion. The economy is very uncertain now due to a pandemic. It will be so in the next two to three years. There may be various opinions within the committee, but the possibility of doing so according to their prospects is separate. .”

⑥ Maintain the easing policy even if the unemployment rate improves

“When evaluating employment, we don’t just look at the unemployment rate, we look at a number of indicators of the labor participation rate. The unemployment rate does not represent the entire job market.”

“The unemployment rate is a very poor statistic. It’s hard to see that the increased unemployment rate for Blacks and Hispanics is much higher than it was before the epidemic.”

⑦ asset price is high

“By some criteria, I can say that the valuation of some assets is historically high. I think this is certain.

⑧ Announcement on SLR (Complementary Leverage Ratio) soon

“I will not answer now. There will be a separate announcement soon.”

In fact, most of them were already spoken. What stood out was that he ignored the dotplot and said he would announce the SLR at a later date. In the case of SLR, there were many opinions that interpreted it as an extension. As for the disparity of the dotplot to the point of’individual opinions of the committee,’ the term “funeral day on the dotplot” (former Paul McCauley, former chief economist of Pimco) even came out.

Goldman Sachs said after the FOMC ended, “We expect that tapering will continue to occur early next year and the base rate hike will occur in the first half of 2024.”

On that day, the Dow index rose 0.58%, closing at 33,015.37. This is the first time that the Dow has exceeded the 33,000 closing price. The S&P 500 index also rose 0.29% to 3974.12, closing at an all-time high. The NASDAQ rose 0.4%. Economically sensitive stocks such as energy banks have risen more, but technology stocks also reduced their decline or turned to an uptrend after the announcement of the FOMC results.

The bond market also saw a sharp decline in the yield on two-year Treasury bonds linked to the Fed’s base rate. The same is true for 5-year products.

However, 10-year bonds fell to 1.61% and then rose slightly, moving at the 1.64-1.65% level. In particular, in the case of 30-year products, it jumped sharply right after the 2 pm announcement and reached the highest level on this day. A Wall Street official said, “30 years is an area that is not affected by the Fed.”

A Wall Street official said, “Today the mayor was convinced by Powell’s remarks, but things can change at any time.” The Wall Street Journal (WSJ) said, “Powell’s biggest challenge will be for the US economy to grow beyond expectations.” If inflation exceeds 3% and the pace of economic improvement gets faster, it means the market will be suspicious of the Fed again.

In fact, if only three more Fed members move into 2023, the median value of the base rate increase will change. Of course, Chairman Powell can say it’s a “personal outlook” and ignore it again. However, the market may not go as smoothly as it is on this day.

Reporter Kim Hyun-seok [email protected]