The Fed accelerated the tightening of monetary policy, and the market rebounded

Overnight, the Federal Reserve FOMC held its last interest rate meeting of the year on the 14th and 15th. The meeting was long, but the conclusion was short. The conclusions are as follows: [1]

Starting from January next year, the monthly bond purchase scale will be reduced by US$20 billion in Treasury bonds and US$10 billion in MBS, that is, the bond purchase scale in mid-January will be reduced to US$40 billion in Treasury bonds and US$20 billion in MBS.

Looking back at the 11/4 article "The Fed Tapers as Expected!", we can see that the meeting was held in November and the reduction of bond purchases was immediately implemented in November and December. From the initial release plan of 80 billion in Treasury bonds + 40 billion in MBS per month, it was reduced to 700+350 in November and further reduced to 600+300 in December. It was reduced by 100+50 every month.

If it is reduced by 100+50 per month, then in January 2022, it should be tightened to 500+250, in February, 400+200, in March, 300+150, in April, 200+100, in May, 100+50, and in June, 0+0, completing the task of withdrawing money and stopping the Fed's balance sheet expansion.

The conclusion of the current meeting is that starting from January next year, the rate of water withdrawal will be doubled to 200+100.

According to the calculation of 200+100, in January 2022, it will be tightened to 400+200, in February, 200+100, and in March, 0+0. The task of tightening liquidity will be completed one quarter ahead of schedule, and the Fed’s balance sheet expansion will stop.

The "taper" here does not refer to shrinking the balance sheet, but rather tightening the pace of expanding the balance sheet. The Fed is still releasing money, but the tap is being tightened, and the pace of balance sheet expansion is slowing down.

As for interest rates, the zero interest rate range of 0-0.25% remains unchanged. There will be no interest rate hike before the monetary policy is completed, but Powell also said that it is possible to raise interest rates before full employment is achieved. From the dot plot of the Fed officials' votes this time, we can also see that the possibility of an expected interest rate hike has greatly increased. The median expectation is that in 2022, the interest rate will be raised to around 0.9% after several interest rate hikes.

In the post-meeting statement[2], there was also a provision: if there were any changes in the economic outlook, the pace of bond purchases could be adjusted at any time.

This result is not particularly surprising. As recorded in the article "Powell's Tough Talk" on December 1, Powell had already publicly announced that he would speed up the withdrawal of funds half a month ago.

This hawkish shift has been regarded as the most drastic hawkish shift in the Fed’s monetary policy in recent years. The main reason behind it is the high inflation that can no longer be concealed. From the refusal to acknowledge in the June meeting (June 17 “Inflation is not out of control, the Fed will not raise interest rates”), to the deception in the September meeting (September 23 “Fed Copy and Paste”), to the recognition of inflation in the November meeting (November 4 article “Fed Tapes as scheduled!”), and finally to the last meeting at the end of December, the Fed recognized the severity of inflation and made a move to increase its determination and efforts to control inflation.

Since the Federal Reserve says every day that the guiding indicators of monetary policy are employment rate and inflation, the inflation issue that is now hyped by the media has become a hot potato in Powell's hands (12/11 "The United States encounters high inflation, and the market is in a life-and-death situation").

The expected shoe finally landed, and the market breathed a sigh of relief. U.S. stocks rebounded and the currency market stopped falling and rebounded.

The first interest rate meeting of the Federal Reserve next year will be held on January 25 and 26, 2022[3]. The Federal Reserve said to us, see you next year!