Tao Dong, Director of Credit Suisse First Boston and Chief Economic Analyst for Asia, wrote on his personal blog that the Fed will not delay the timing of policy changes, but the intensity will be smaller. Pigeon” and predicts that the Fed will begin to reduce debt purchases in the last two months of this year.
The following is the full text of the blog:
The much-anticipated Jackson Hole annual meeting was held last week. Fed Chairman Powell strongly hinted that the asset purchase plan launched last year would be reduced during the year, but he was able to say that U.S. stocks and U.S. bonds rose together. He told the market that the timing of the policy turnaround was “appropriate”, but at the same time he discussed the deficiencies in the economy very dovishly, implying that policy changes would be slow and depend on economic conditions.
After his speech, the S&P500 and the Nasdaq Index reached new highs, and European stock markets also rose mostly. U.S. Treasury bonds rose instead of falling. The interest rate on the two-year Treasury bond, which was most affected by the policy, fell to 0.22%, and the major European Treasury bonds also followed suit. The Federal Reserve receives water,DollarThe exchange rate has fallen, and the price of gold has risen. When the Gulf of Mexico hurricane hit, oil prices stopped falling and rebounded sharply.
In his keynote speech at the annual meeting, Powell reiterated the statement in the minutes of the last FOMC meeting. “Most committee members believe that it is appropriate to adjust the debt purchase limit during the year,” and said that he agrees with this position. This is the clearest hint from the Fed chairman that reducing the size of debt purchases is likely to start in the next few months. Powell did not directly announce the policy turnaround, but he gave enough hints that the purpose is not to repeat the impact on the market when the Fed suddenly started withdrawing in 2013. The most striking thing is that Powell made it clear that reducing the amount of debt purchases is not linked to a rise in interest rates, laying a placebo for the bond market.
The author believes that Powell will not delay the timing of the policy turn, but the intensity will be reduced. The former is a political statement that he must make, and the latter is his true thoughts. It is estimated that the Fed will begin to reduce the amount of debt purchases in the last two months of this year. Since the number of debt purchases itself has not reached the upper limit, the impact on liquidity in the first few months will not be significant, which may have a slight impact on market confidence. The U.S. stock market recorded its first leverage reversal since March last year.
The Fed’s recovery of liquidity will begin after about mid-2022, and it is estimated that it will gradually reduce its balance sheet in accordance with the principle of slowing down.
The author would like to point out that under the reignited epidemic and bottlenecks in the industrial chain, the economic recovery of the United States will be slower than expected in the future. Major US investment banks have lowered their US economic growth forecasts. Credit Suisse has just lowered its economic growth in the second half of the year from 7.1% to 5.4%. This is still a strong growth figure, still higher than the potential growth rate, but not as overheated as previously predicted. This also provides a reason for Powell to act slowly.
The serial bombings near Kabul Airport on Thursday may have had a great impact on Biden. Some US media have compared him with President Carter, who failed to rescue the Iranian embassy hostages in 1979 and left the corpse of the US army to evacuate. Carter was not. Few commentators consider him the most defeated US president after the war.
The United States ignored the strong opposition of its European allies and withdrew its troops suddenly, which also brought huge political shocks to the European allies. Many European countries originally deployed troops in accordance with NATO terms and implemented “collective defense.” Those troops thought it was only those who used to maintain peace and dig wells to repair schools. After stepping into Afghanistan, they discovered that they were facing the danger of attack by the locals at all times. European governments tried their best to deal with the issue of Afghan troops in a low-key manner, but the United States ran away first. This will definitely weaken Europe’s trust in the United States, and is detrimental to the diplomacy of the Biden administration in the future.
More importantly, Biden’s status in the eyes of Americans may plummet. He is famous for his smooth handling and good diplomacy, and he also played these cards in elections. However, this incident has greatly compromised his credibility, and public opinion will definitely decline significantly. It is estimated that the honeymoon period created by fighting the epidemic and distributing relief for the first 100 days after visiting the main White House is over. This will have an impact on his future governance and even affect his two fiscal stimulus plans.
The focus of the market this week is the repricing of assets by the market after Powell’s speech, especiallyDollarexchange rate. The focus of the data is the non-agricultural employment figures in August. It is estimated that 850K new jobs will be created, and the unemployment rate will drop to 5.3%. However, the uncertainty is high due to the renewed epidemic. The PMI of China and the ISM of the United States also need attention.
This week’s diary describes the author’s understanding and knowledge of the economy, policies, and markets. It is a personal point of view, not investment advice or solicitation.