According to a research report released by Joaquin Securities, the Federal Reserve's decision-making framework has experienced half a century of evolution and upgrading, and by 2020, it has basically formed a more mature economic cycle change and shock response model. After the outbreak of the COVID-19 pandemic, the Federal Reserve's monetary policy can be roughly divided into four phases, and the current phase is late in the third phase, and the fourth phase is likely to be less accommodative than the market expects.
The main views of Joaquin securities are as follows:
The sudden increase in uncertainty of the pandemic shock, excessive easing and deficit monetization stimulate demand.
The pandemic triggered great uncertainty, and the Fed quickly decided on zero interest rates plus unlimited QE. In March 2020, the Federal Reserve quickly decided to implement unconventional quantitative easing, including three aspects: first, to reduce interest rates to the zero lower bound;
Second, the new round of QE program to restart the purchase of Treasury bonds and MBS said that the size of the purchase is "not set an overall cap", and even added commercial mortgage-backed securities (CMBS) to the range of MBS bond purchases, which goes further on the road of direct central bank purchases of bonds with credit default risk than the QE in 2009-2014;
Third, a series of loan and repo liquidity support tools launched in 2008 all resumed use, and launched some new liquidity delivery tools including PPPLF, PMCCF, SMCCF, etc., so that the breadth, depth and speed of this round of quantitative easing are far beyond the previous round. The rapid expansion of the balance sheet highlights the blindness of the decision-making model based on current economic performance. Aggressive buying of MBS, record low long-term interest rates, and deepening of the real estate bubble.
Demand is overheated, supply is suppressed, and inflation is on the rise.
The relatively aggressive operation of "fiscal deficit monetization" by the Federal Reserve quickly promoted the abnormally high increase of residents' income in the period of economic shock through the channels of fiscal subsidies and residents' income transfer, and the consumption demand for commodities quickly became overheated.
During the period of huge subsidies, the employment willingness of American residents was suppressed to a certain extent, the recovery of industrial production was relatively slow in 2021, the overheated demand failed to effectively pull local production, and the rapid expansion of the demand gap made the core inflation of the United States start to rise sharply, but under the follow-up disturbance of the epidemic, the Federal Reserve maintained the loose policy stance of zero interest rate +QE throughout 2021. Has connived at a relatively sharp upturn in US inflation.
Supply and demand remain hot, wage inflation spirals and a hawkish Fed becomes more determined.
At present, the United States is still in a period of gradual digestion of excess savings caused by excessive subsidies in the previous period, and household income and consumption purchasing power are still strong. In addition, the US government's increasingly obvious industrial policy trend of "decoupling and breaking the chain" has made its industrial production continue to exceed market expectations since 2022. The accelerated recovery of supply capacity is reflected in strong labor demand, coupled with higher wage expectations after the end of the huge subsidy program, and the largest upward process of core inflation in nearly four decades has made residents particularly worried about the loss of their purchasing power, which has fostered and continuously reinforced the current "wage inflation spiral."
During this round of QE, the speed of US residents' purchase of leverage was significantly more restrained than that of the 2001-2006 real estate bubble period, and in the two years since the long-term interest rate began to rise, the sales volume of the US real estate market has cooled rapidly, so that the potential loss risk of asset quality brought by commercial banks can be controlled as a whole. Based on three factors, such as demand overheating caused by excessive stimulus in the early stage, the driving effect of anti-globalization policies on short-term production and employment, and the persistence of wage inflation spiral, it is expected that the real GDP of the United States will grow by 2.3% and 1.8% in 2023 and 2024, and the probability of the United States economy falling into recession is low.
The U.S. unemployment rate is likely to stay low at 4 percent or lower for longer, and core inflation may not move down toward the Fed's latest forecast path until 24Q4. It is still expected that the Federal Reserve will raise interest rates again by 25BP at the November FOMC meeting, and the first rate cut is expected to start no earlier than the second half of 2024, and the rate cut path is expected to be relatively gentle. The dollar index center is expected to reach around 105.5 by mid-2024. It may continue to bring certain constraints and pressure on the marginal easing of China's monetary policy and the RMB exchange rate.
Risk warning:
The Federal Reserve's interest rate hike and monetary tightening exceed market expectations, and the RMB exchange rate depreciation is expected to be a strong risk.