Opinion | The Fed’s “hawkish stance” may be approaching its peak

Source: in Yiyu

Author: Huachuang Macro Zhang Yu Team

1. The “big gesture” continues to escalate: most Fed officials have recently turned hawks

Recently, most Fed officials have turned hawkish. In May, the Fed will raise interest rates by 50bp and discuss shrinking its balance sheet or it may be imminent. Since April, most officials who were neutral in the early stage (not explicitly supporting a 50bp hike) have clearly expressed their support for a 50bp hike in May, and have begun to consider the idea of ​​raising interest rates beforehand.

In addition, the stance on the end point of interest rate hikes generally supports raising interest rates to the neutral interest rate level or above the neutral interest rate level (according to the forecast value released by the FOMC meeting in March, the current neutral interest rate forecast by the Fed is 2.4%). Bullard, the most hawkish, supports a rate hike to 3.5% this year. Judging from the experience of the last round of interest rate hike cycle, the end point of interest rate hike is flat at the Fed’s neutral interest rate level, which also shows that the current Fed officials’ guidance on interest rate hike expectations is hawkish.

Under the guidance of the hawkish expectations of Fed officials, the market has begun to expect continuous interest rate hikes of 50bp, or even a single rate hike of 75bs. According to CME’s estimated rate hike expectations, the market currently expects a 97.6% probability of a 50bp rate hike at the May FOMC meeting, and a 50bp rate hike in May is almost certain; and it is expected that there is a 77% probability of a 75bp rate hike in June, and a 75bp rate hike in July. Another continuous rate hike of 50bp. Since U.S. inflation has not yet peaked, the Fed is likely to maintain a more aggressive hawkish stance in order to curb inflation expectations. Under the hawkish expectations, the real interest rate of 10Y U.S. bonds has almost turned positive, pushing up the nominal interest rate of 10Y U.S. bonds to quickly rise above 2.9%.

In February and April, the Beige Book’s focus on inflation further increased

At the same time, the Federal Reserve released the April Beige Book this week. It can be seen that the attention and severity of inflation issues in the Beige Book have further increased compared with March, reflecting the increasing importance of inflation issues in the Fed’s policy decisions. promote. In addition, in terms of economic fundamentals, the status quo of commercial real estate and manufacturing has improved, and service consumption has also improved positively amid the easing of the epidemic. The background of moderate growth in economic activity has also laid the foundation for the Federal Reserve to tighten monetary policy more quickly. Specifically, the Fed’s Beige Book in April showed three changes: 1. The feedback on real estate and manufacturing was more optimistic; 2. Rising inflation intensified the pressure on wages, both of which may form a spiral upward pressure; prices The rise had a negative impact on sales.

3. Supply chain improvement + inflation may peak, and the Fed’s hawkish posture may have peaked

Recently, the shortage of transportation in the United States has been significantly improved. In terms of port transportation , on the demand side, the U.S. container throughput is still at a high level; but on the supply side, the number of U.S. shipping service employment has returned to pre-pandemic levels, and congestion at major U.S. ports such as Los Angeles and Long Beach are all high. Noticeably better. In terms of land transportation, on the demand side, the market demand for road transportation has dropped compared to 2021, and the pressure on transportation demand is easing; on the supply side, the number of trucks that can be supplied has increased significantly compared with the same period last year, and the number of employment in truck transportation has been higher than before the epidemic. Horizontal, trucking delays have also narrowed considerably. Therefore, on the whole, the tight supply of ports and land transportation has improved significantly, and the pressure on inflation has weakened.

Inflation has a high probability of peaking in the second quarter, and the Fed’s extremely hawkish posture may have reached its peak . Calculating the conditions required for U.S. inflation to not peak in the second quarter, it can be seen that if the U.S. CPI in Q2 does not peak year-on-year, the average month-on-month CPI of Q2 needs to exceed 0.9%, and since 1957, the month-on-month ratio of more than 0.9% has accounted for It is less than 10%, so the probability of U.S. inflation peaking in Q2 is high. Superimposed that the current supply chain conditions have improved, the supply-side inflationary pressure may also ease. If inflation peaks in Q2, the Fed may no longer need to adopt an extremely hawkish tightening stance to curb inflation expectations. At that time, the Fed’s forward guidance and actual tightening operations may be relatively moderate, and the Fed’s hawkish stance may reach its peak.

Risk Warning: U.S. Inflation Surpasses Expectations

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