The Fed releases pigeons again: how long can it last?

At 2 o'clock in the morning on July 29, the Federal Reserve once again issued a dove voice. 

The Fed's decision to keep the federal funds rate unchanged at zero to 0.25% is in line with market expectations. The Fed reiterated that it will keep its $120 billion monthly asset purchase plan unchanged and evaluate economic performance in real time until the U.S. economy makes real-time progress. Fed Chairman Powell emphasized that raising interest rates is still a distant matter.

After setting the tone, the U.S. financial market has received a lot of feedback on this:

The S&P 500 quickly pulled up from a drop of 0.23% to 0.31%, and then its gains fell.

The same is true for the Nasdaq Index, which rose sharply after the interest rate meeting and fell slightly in late trading.

The U.S. dollar index reacted very violently, rapidly diving from 92.7558 points to 92.2391, with a diving amplitude of as high as 0.56%, setting a new two-week low.

In terms of gold, COMEX quickly pulled up from US$1793 to US$1808, an increase of 0.83%.

However, the changes in the US Treasury bond market were not obvious. As of the latest, the 10-year U.S. Treasury bond yield was 1.238%, continuing to maintain the same level as in February this year.

Judging from the overall feedback from the US financial market, the results of this interest rate discussion basically met market expectations, and there has been no hawkish position to make a radical turn in the currency.

After the Fed announced the interest rate decision, Powell made many statements at the press conference:

Regarding the Delta virus issue, Powell said that in the case of the delta strain spreading, one can only maintain observation. The epidemic last winter did have an impact on employment. The delta strain may affect the full recovery of the labor market, but the impact of the delta strain on the economy this year may be smaller. As long as the new crown pneumonia epidemic does not end, no one can guarantee safety. It is necessary to ensure that the vaccine is vaccinated globally.

Regarding the issue of inflation, Powell said that the inflation rate has risen significantly, and it is expected that the inflation rate in the next few months will exceed 2%, and it will remain high in the next few months before easing. Inflation is still expected to fall to the long-term target of 2%, which may be higher and longer-lasting than expected. The long-term inflation expectations are still within the Fed's target. If the inflation path continues to exceed the target by a large margin, the Fed is prepared to adjust its policy.

Powell said that the Fed has assessed the considerations for adjusting debt purchases, but there is still a long way to go before substantial progress is made. The Fed will assess economic progress in the next few meetings, so there is still a long way to go before considering raising interest rates.

Powell said that the Fed has not yet made any decision on the timing of reducing quantitative easing. For the first time in this meeting, there was an in-depth discussion on the time, speed, and composition of reducing the scale of debt purchases, but no decision was made. Regarding when it is appropriate to reduce debt, the Federal Open Market Committee (FOMC) has many different views, but almost no one supports reducing the purchase of mortgage-backed bonds (MBS) first, and then reducing the purchase of US debt. Reduce MBS and Treasury bond purchases. FOMC members also have many different views on reducing the time to purchase debt. July was a good policy meeting, but the time for reducing QE has not yet been decided.

Although the Fed is still carrying monetary easing and continuing the statement that "inflation is only temporary", under the pressure of reality, it still faces the risk of a sharp currency turn.

In June this year, the U.S. CPI climbed to 5.4%, an expected increase of 4.9%, the previous value of 5%, the largest year-on-year increase since 2008. The core CPI of the United States in June increased by 4.5% year-on-year, and is expected to increase by 4.0%. The previous value was 3.8%, a 30-year high.

In addition, the delta virus looting has cast a haze on the global economy. As of July 28, there were more than 195 million confirmed cases of COVID-19 worldwide and more than 4.18 million deaths.

In the past week, 8 more countries and regions have discovered the Delta new crown variant virus, which has spread to 132 countries and regions.

The global number of new crown infections increased by 8% last week to more than 3.8 million cases. The latest data show that cases in the Americas and Western Pacific Region have risen sharply, with an increase of 30% and 25% respectively. This led to a significant increase in the overall number of deaths from the new crown, which rose by 21% compared with last week to more than 69,000.

In the past 7 days, the United States has reported the highest number of new cases, with more than 500,000 new infections, an increase of 131%. American infectious disease expert Fauci said on July 26 that given that half of the US population has not yet been vaccinated, according to data modeling predictions, the worst situation in the United States is that the number of deaths per day will reach 4,000, which is the same as the peak of last winter. The U.S. media predicts that the new crown epidemic in the U.S. will enter its peak again around October.

The resurgence of the epidemic in the United States will have a certain impact on the better momentum of economic recovery. On the one hand, inflation continues to rise, and on the other hand, the foundation for economic recovery is very fragile, and the epidemic is once again facing the impact of the epidemic, so that the economy will face the risk of "stagflation" in the future. This is the most difficult economic state for central banks.

Of course, the further deterioration of the US epidemic will give the Fed more excuses to continue the QE policy. But the essence behind it is to maintain stability in the historically high financial market and safeguard the interests of Wall Street. But behind this mysterious operation, the biggest pressure comes from the inflationary specter that has escaped from Pandora's Box. Inflation that is already "out of control" will not disappear for no reason. Without a monetary contraction, I am afraid I am a little bit self-deceived to expect that inflation will naturally peak and fall sharply.