The Fed Called "To Raise Interest Rates". The Market Is Convinced.

The weak balance between the market and the central bank depends on the easing of the central bank. Once the central bank really tightens, there is a risk of collapse in the market, and the market is forcing the central bank to not really tighten up.

With the Fed's concession again and again, the market is pressing harder, and the market no longer believes that the Fed can return to normal interest rates.

This is like the story of "wolf coming", when the Federal Reserve begins to shout "to raise interest rates". The market is convinced, but with the falsification of interest rates again and again, the long-term interest rate forecast is lowered again and again.

The most intuitive contrast is that after three years of interest rate forecasts, the Federal Reserve in September forecast interest rates for 2017 still up to 1-1.25%, while interest rate futures reflect the market expected to be only 0.5-0.75% in 2017, the market expectations and the Fed's expectations of a difference of 0.5%, corresponding to the two interest rate increase, which fully expressed the market's distrust of the Fed.

The Federal Reserve issued a statement on September FOMC meeting, announcing that the federal funds rate 0.25-0.5% will remain unchanged.

In combination with the FOMC conference statement and Yellen press conference, we believe that there are three key information points:

The first key information point: the FOMC meeting in September kept the federal funds rate unchanged, which was in line with market expectations.

Before the outcome of the meeting, the US interest rate futures implied a September interest rate increase of 10%-20%. That is to say, the market did not think the Fed would raise interest rates in September, and the Fed's decision was in line with market expectations.

The market believes that the reason for not raising interest rates in September is in line with Yellen's statement, because the improvement of US economic data is not stable.

For reasons of not raising interest rates in September, Yellen said "to see more evidence of employment and inflation improvement".

The market does not believe that the Federal Reserve will raise interest rates in September, mainly because of poor economic data in August.

In August, PMI in the US manufacturing and non manufacturing industries decreased by 3 points and 4 points to 49.4 and 51.4 respectively. The non manufacturing PMI was the lowest in 2 years.

In terms of non-agricultural data, in August, the number of non-agricultural businesses was only 150 thousand, far below market expectations.

Second key points: the Fed and Yellen believe that the rate hike in December is

But the market does not buy it.

In September, the FOMC conference statement added "the reason for raising the federal interest rate has been strengthened", Yellen said in a press conference that if there is no significant risk, it is expected to raise interest rates once this year.

From the dot matrix diagram, it is considered that the percentage of FOMC members who need to raise interest rates in December is 82%.

We speculate that the market does not accept that the Fed will raise interest rates in December, mainly because of the uncertainty of the Fed's premise of raising interest rates, Yellen's "evidence of more employment and inflation improvement".

Since 2016, the US economic data are in good and bad condition. The non farm employment data in 1, June and August are significantly lower than the market expectations. In April and August, PMI is much lower than market expectations. Who can guarantee that 9-11 months of US economic data will not produce any moths? As long as the economic data are significantly weaker than expected, the Fed's rate hike process may slow down again, which may be the main reason why the market does not believe the Fed and Yellen's position.

The third key information point: the Fed lowered its long-term interest rate forecast, which is the third reduction in the fed during the year. It is also an important reason for the market's distrust of the Federal Reserve.

At the end of each quarter's FOMC meeting, the Federal Reserve will announce the forecast of the federal funds rate in the future, including the interval, center and median of the 2016-2019 and longer term federal funds rate, which is an important channel for the market to obtain the intentions of the Federal Reserve's future monetary policy.

According to the Fed's meeting documents, the Federal Reserve in March, June and September three interest rate meetings lowered the central forecast of 2016-2019 years and longer term interest rates, taking the median forecast of longer-term interest rates as an example. In 2016, the three Conference on interest rates fell from 3.5% to 3.3% and 3.3% to 3% and 3% to 2.9% respectively.

From the dot matrix diagram, the results are basically consistent with the interest rate central prediction.

The center is also down again.

In September, it was considered that the appropriate members of the 0.25-0.5% in 2016 were 3, while June was 0. In September, the median of 2017, 2018, and longer periods in September was 1-1.25%, 1.75-2% and 2.75-3% respectively, while the median of 6 months was 1.5-1.75%, 2.25-2.5% and 3-3.25%, which was basically equivalent to a 0.25% interest rate hike.

It should be noted that in 2016, the Fed released three interest rate forecasts, while the three interest rate forecasts were all downgraded.

In other words, 2016 was the year of the Fed's abnormal doves. By the end of September, not only did the interest rate increase, but the interest rate hike continued to be lowered.

This is in line with our "dollar cycle" peaked at the end of 2015. "Hai Qing's FICC channel" report in December 2015, "the big turning point is coming: the peaking period of the US dollar commodity market bottomed out" (Deng Haiqing and Chen Xi) put forward that "with the convergence of the monetary policy direction of the Central Bank of Europe and the United States, the US dollar index is peaking and commodities are rebounding for a long period".

An important logic of the market is not to listen to what the Fed says, but to see what the Fed does.

Although the Fed and Yellen fully expounded the idea of raising interest rates in December at the September meeting, the market saw the Fed's continuous retreat on the issue of raising interest rates since 2016. No wonder the market did not buy the expected management of the conference.

To sum up, the interest rate conference kept interest rates unchanged and lowered long-term interest rate forecasts.

Although the Fed and Yellen hinted that the rate hike in December reached the highest level in history, the market did not buy it. On the one hand, because of the change in US economic data in 9-11 months, on the other hand, the fed in 2016 was too pigeon, and its hawk attitude was no longer recognized by the market.

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Behind the unusual doves lies a more frightening possibility: the Fed has been abducted by the market and lost its monetary policy independence.

The independence of the central bank in textbooks refers to "the central bank should be independent from the government", but the present situation is: "the central bank may not be independent of the market".

Since 2008, global financial markets have become addicted to monetary easing in the global central bank, although the global economy is significantly weaker than before the financial crisis, but the stock market in developed countries is generally higher than before the financial crisis.

"Hai Qing FICC channel" believes that the market needs to be alert to the risk of "wolf coming" in December.

In the story of "wolf coming", although the shepherd boy lied many times, the wolf came for the last time.

At present, the market expects only 60% interest rate hikes in December, and nearly half believe that the US Federal Reserve will not raise interest rates in December, which is precisely the biggest risk.

If this time, the wolf really came?