Whether the Fed raises interest rates is related to the judgment of the future trend of the world economy, the adjustment and shift of current global financial policies, and people’s assessment of the extent and harm of inflation after the flood.
On June 17, the Federal Reserve issued an economic forecast and policy statement, predicting that it will achieve two interest rate hikes by the end of 2023, with interest rates rising from 0.1% to 0.6%. At the same time, the Fed adjusted its inflation rate forecast for the fourth quarter of 2021 to 3.4%, and the overall inflation index is expected to fall back to 2.1% in 2022, and to 2.2% in 2023.
Federal Reserve Chairman Jerome H. Powell stated at a press conference that the decision to keep interest rates unchanged and continue to purchase government-backed bonds will ensure that monetary policy continues to provide strong support to the economy until the end of the economic recovery .
Powell acknowledged the current price surge, saying that the indicators of long-term inflation expectations have generally reversed the decline of related indicators in the early stages of the epidemic, and are now at a level that is in line with the Fed’s goals. Powell pointed out that if inflation exceeds the target set by the Fed, the Fed will be prepared to respond by reducing monetary policy support.
After the interest rate meeting, the three major U.S. stock indexes fell after hearing the wind. The Nasdaq futures fell 1% after the market, the U.S. dollar index surged 1% overnight, the 10-year Treasury yield rose 6.2%, and gold fell more than 2%. The currency plunged nearly 7% in a short time, falling below 39,000 US dollars.
The abnormal performance of financial markets all point to the same signal-the inflection point of dollar liquidity has begun.
The interest rate hike is expected to be released in advance, the Fed turns from a dove to an eagle
After the outbreak of the new crown epidemic, the Federal Reserve released water on a large scale, and the capital market prospered. However, the evil of high inflation has also come as promised.
The U.S. inflation rate was only 1.7% in February, soared to 4.2% in April and 5% in May, setting a new high in August 2008, far exceeding the 2% average target line and exceeding the 3% tolerance stated by the Federal Reserve degree.
Inflation, one of the two major goals of the Fed’s macro-control, has shown a state of out of control. Therefore, market traders focused their attention on the Fed’s interest rate resolution.
The following are the main points of the results of the Fed’s meeting on interest rates:
1. Continue to maintain zero interest rates.
2. 70% of Fed officials began to support interest rate hikes before the end of 2023, and there were only 7 in March. This means that the median time for the Fed’s internal interest rate hike expectations has been advanced from 2024 to 2023. That’s why there is a saying that “the Fed is expected to raise interest rates ahead of schedule”.
3. Seven people support interest rate hikes in 2022, accounting for 40%. In the last interest rate meeting, only four people supported interest rate hikes in 2022. This time there are three more people.
4. Significantly increase the inflation forecast for this year, and believe that the overall inflation forecast this year will reach 3.4%. (Compared with the last interest rate negotiation, I believe that the overall inflation rate this year is 2.4%, an increase of 1 percentage point.)
5. Increase the excess reserve ratio (IOER) by 5 basis points to 0.15%, and increase the overnight reverse repurchase agreement interest rate (RRP) from 0 to 0.05%.
The Fed’s interest rate hike expectations are not a promise, but will change dynamically based on actual conditions. Before U.S. inflation got out of control in March, Fed officials generally believed that interest rates would not be raised until 2024. Only three people supported a 2022 interest rate hike. But as inflation in the United States has run out of control in the last two months, Fed officials who support early interest rate hikes have begun to increase. This means that if US inflation continues to run out of control in the next six months, the Fed does not rule out the possibility of further interest rate hikes ahead of schedule.
But at the press conference after the meeting, the Fed still insisted that inflationary pressures were “temporary.” Despite this, in the face of the current severely distorted financial markets in the United States, there is a record high volume of reverse repurchase scale. The Fed had to respond honestly in two aspects: raising the excess reserve ratio and the overnight reverse repurchase agreement interest rate.
These two adjustments are aimed at the current reverse repurchase market in the United States. Contrary to my country’s central bank, the US releases liquidity through positive repurchase, while reverse repurchase recovers liquidity.
Currently, the United States has an unusually large amount of reverse repurchase scale. In the past week, the Fed’s daily reverse repurchase scale exceeded US$500 billion, far exceeding the historical high of US$475 billion set in 2015. This means that U.S. financial institutions lend large amounts of cash to the Federal Reserve through reverse repurchase tools and exchange cash for U.S. Treasury bonds as collateral, with an interest rate of only 0%. Therefore, the US reverse repurchase is the last place to go when the US money market is flooded with liquidity. In other words, the Fed printed money with its left hand, but its right hand had to recover money from the flooded money market.
This time the Fed still announced that it will continue to maintain a monthly QE scale of 120 billion U.S. dollars in money printing. But at the press conference, Powell stated for the first time that “commissioners at the meeting began to’refer to discussions’ to reduce the Fed’s monthly asset purchase plan by US$120 billion.” This means that the Fed has begun substantial discussions about reducing QE.
For this reason, although the Fed still maintained a zero interest rate and a monthly printing rate of 120 billion U.S. dollars in the Fed’s interest rate meeting, it was widely interpreted by the outside world as the Fed’s first “turn from a dove to an eagle” in the past two years.
Although the Fed said the U-turn of its monetary policy was extremely euphemistic and made a lot of cover-ups on this issue, the market’s reaction was more real, believing that the Fed’s monetary policy is about to turn, and the era of the most proliferation of US dollars is over.
The three major U.S. stock indexes closed down for two consecutive days, and the U.S. dollar index rose above 91 for the first time in a month
After the announcement of the Fed’s resolution, the three major US stock indexes closed down collectively for two consecutive days.
The Dow fell for three consecutive days, closing down 265.66 points, or 0.77%, to 34,033.67 points. It was the first time since May 18 that it closed down more than 200 points, and it also hit a new low since May 19. Standard & Poor’s closed down 0.54% to 4,223.70 points, the largest closing decline since May 18, and a new low since last Wednesday, June 9. The Nasdaq closed down 0.24% to 14,039.68 points, the lowest closing level in the last four days.
The dollar index jumped. When the U.S. stock market closed, the U.S. dollar index was above 91.20, rising nearly 0.8% during the day, rising above 91.00 for the first time since early May.
Affected by the rise of the US dollar, the offshore renminbi (CNH) fell for the fourth consecutive trading day . At 5:59 on the 17th Beijing time, the offshore renminbi was quoted at 6.4405 yuan against the US dollar, a record low since the end of New York trading on May 17.
This also led to a sharp drop in the price of gold, while the yield on the US 10-year Treasury note hit its biggest one-day increase since March.
On Wednesday night, the 10-year U.S. Treasury yield at around 1.49% jumped to 1.59%, setting a new intraday high since June 4, and the intraday increase was more than 9 basis points. By the time U.S. stocks closed, it was nearly 1.58%. It rose by more than 8 basis points during the day, the largest increase since March 12.
COMEX gold futures reported 1814.25, closing down more than 2%, a record low in more than a month.
Bitcoin once dived nearly 7%, falling below $39,000
OKEx data shows that mainstream cryptocurrencies fell across the board on Wednesday.
On Tuesday, Bitcoin had risen to $41,324. After the early signal of the Federal Reserve’s interest rate hike expectations was released, Bitcoin was affected by this, and it fell below $40,000 to a minimum of $38,554, with an intraday drop of 6.91%. As of press time, Bitcoin’s decline has continued to expand, temporarily reporting $37,780.
Ethereum (ETH), the second largest cryptocurrency in market value after Bitcoin, fell below US$2,380, setting a new intraday low this Wednesday, with an intraday drop of 5.29%.
Binance Coin (BNB), the fourth largest cryptocurrency by market capitalization, and Bitcoin Cash (BCH), the eleventh largest cryptocurrency, fell by more than 6%, Litecoin (LTC) fell by more than 7%, Cardano (ADA) and Doggo DOGE fell more than 5%.
Bitcoin’s shock amplitude is about 7%. It can be said that the Fed’s hawkish signal influence has been great, but on the whole, BTC has also stabilized the situation. The analysis believes that there are four reasons for the relatively strong performance of BTC:
First, the Fed released a hawkish signal, but did not propose a timetable for reducing the bond purchase plan. On the contrary, the previous market forecasts were more pessimistic. In addition, the Fed continued its bond purchase plan, and short-term market liquidity was still very abundant, which would lead to some funds. Continue to flow into Bitcoin.
Secondly, since late May, Bitcoin has experienced multiple rounds of slump, and a large part of the panic disk has been washed out. The current valuation of Bitcoin is close to the cost of holding positions of many large institutions. In this context, MicroStrategy, Ark Investment Management Company and other large institutions have further continued to increase their holdings recently.
In addition, since El Salvador regarded Bitcoin as a legal currency, Latin America and African underdeveloped countries have followed suit. They have successively promoted the legalization of Bitcoin in the local area, or proposed to follow El Salvador, which greatly expanded the use of Bitcoin and market confidence. .
Then, on June 14, Tesla CEO Elon Musk tweeted that after confirming that miners use a reasonable proportion of clean energy (about 50%), and the future trend is positive, Tesla will re-allow the use Bitcoin transactions. Musk’s remarks further enhanced market confidence.
Judging from historical data, the Fed’s interest rate hikes often correspond to the decline in the price of Bitcoin. As more and more U.S. stock companies increase their holdings of Bitcoin, the impact will undoubtedly be even greater. The Fed’s interest rate hike schedule is constantly moving forward, which also means that the risks in the crypto market may gradually increase, and investors should take precautions rationally.
