Directly hitting the Federal Reserve's interest rate meeting: Powell's hawkish speech brings negative signals, capital markets face an uncertain future

Author: Wang Jiajian, Babite

The shoes have finally landed.

At 3 a.m. Beijing time on the 27th, the Federal Reserve's FOMC statement announced that it would maintain the interest rate on excess reserves (IOER) at 0.15%. Asset purchases will end in early March. The federal funds rate will be appropriately raised soon. The discount rate will remain unchanged at 0.25%. The reduction of the balance sheet will begin after the interest rate hike.

This means it aligns with market expectations.

After the Federal Reserve's interest rate decision was announced, the three major U.S. stock indices rose sharply in the short term, with gains expanding. The Dow Jones rose by 1.2%, the Nasdaq rose by 2.9%, and the S&P 500 index rose by 1.93%. Affected by this news, Bitcoin briefly rose by 2%, breaking through $38,800. ETH rose by 3%, surpassing $2,700.

However, after Federal Reserve Chairman Powell spoke, his clearly hawkish remarks caused trading sentiment in the U.S. stock and crypto markets to plummet, leading to a rapid correction in asset prices.

Thus, from the performance of capital market prices alone, it is evident that the market is greatly influenced by U.S. monetary policy and the U.S. stock market, and there is a significant "discrepancy" in prices here.

What did the Federal Reserve and Powell actually say?

If we look solely at the Federal Reserve's FOMC statement, the outcome is in line with market expectations.

Let's take a closer look at the Federal Reserve's FOMC statement from January, which mentioned many seemingly "useless" but evidently valuable points. Here are some key excerpts:

"The committee decided to maintain the target range for the federal funds rate at 0% to 0.25%. Given that inflation is far above 2% and the labor market is strong, the committee expects that it will soon be appropriate to raise the target range for the federal funds rate. The committee decided to continue reducing the pace of monthly asset purchases, thereby ending purchases in early March. Starting in February, the committee will increase its holdings of U.S. Treasury securities by at least $20 billion and at least $10 billion of agency mortgage-backed securities each month."

What does this actually mean? We have some analyses from traditional market analysts. One analyst named Dennis DeBusschere said, "This FOMC statement has no new highlights, but this rate statement has provided some support to the market in the short term, of course, this support is relative to a 50 basis point rate hike in March or ending QE in January."

Reuters analysis: "The Federal Reserve hinted at a possible rate hike in March and reiterated that it would end bond purchases that month, then begin to significantly reduce its assets (balance sheet). These combined measures will complete the transition from 'the loose monetary policy that defined the pandemic era to a more urgent fight against inflation.'"

Juan Perez, a senior forex trader at Monex USA, said, "The Federal Reserve's decision suggests they do not believe the rate hike will necessarily happen in March, as they are leaving room for adjustments to the policy rate as needed. Keeping the balance sheet size unchanged before starting rate hikes means they have not fully removed all easing measures. We believe this could happen, which is not a good signal for the dollar in the short term."

After the Federal Reserve announced its interest rate decision, Chairman Powell held a monetary policy press conference. This conference also had a significant impact on the market. At least from the performance of asset prices in the crypto market, there was a direct reversal of gains, leading to a decline. What did Powell say?

He stated, "Inflation remains far above our long-term target. Inflation is expected to decline within this year. Given inflation and employment, the economy no longer needs sustained high levels of support. The economic outlook remains highly uncertain and requires humility. The federal funds rate is our primary policy tool. The reduction of the balance sheet will occur after the rate hikes begin. The balance sheet reduction will happen in a predictable manner. No decisions have been made regarding the timing and pace of the balance sheet reduction. We will prepare to adjust all the details of the balance sheet reduction path."

Powell mentioned that both of the Federal Reserve's main tasks are calling for an abandonment of highly accommodative policies. These very "hawkish" remarks caught many people off guard and caused the market to stumble.

In response to Powell's remarks, some analysts commented that it sounded optimistic about the future, but the technical wording leaned hawkish.

Cardillo, Chief Market Economist at Partan Capital Securities, said, "Powell created some uncertainty during the Q&A session of the press conference, and I think that's why the market reacted. Powell said inflation could worsen, and supply bottlenecks could get worse, which should be an attempt to prepare the market for deteriorating conditions and to balance some panic factors. However, this statement is creating an uncertain atmosphere, which is unfavorable for the market."

Mikko, the founder of Zhibao, a KOL in the crypto industry with a good understanding of monetary policy, commented that his 13 years of experience in the industry have almost been of no help in tracking the Federal Reserve, as the path Powell is currently outlining has exceeded almost all possibilities he has experienced.

Clearly, Powell has surprised many people.

Is the market really going bearish? What do crypto people think?

In response to the above content, we see many analysts and KOLs in the crypto industry expressing their insights, which we have excerpted as follows:

"Powell chose the difficult path: he has a hawkish answer to every question. The last time this happened was at the end of 2018." ------@MacroAlf

"The elders gather in a closed room, and they have been doing this since 1913. If the chimney emits black smoke, it means no change. If it emits white smoke, it means they will increase the monetary price by 0.25%." ------@LynAldenContact

"The Federal Reserve's decision was indeed favorable, but as soon as Powell spoke, it turned into a bearish sentiment. However, according to analysts, the current rate hikes are all within expectations and may not lead to significant changes. The impact on the industry is substantial; when the good news was just announced, a large amount of capital purchased, but after the bad news emerged, it peaked and retreated, consuming a lot of bullish momentum. The current trend is not optimistic." ------@Phyrex_Ni

"Don't expect a reversal; rate hikes and balance sheet reductions can only exceed expectations, and there won't be any surprises below expectations. They will try to avoid black swans, and policy matters will be prepared for the market psychologically. However, the direction and purpose are clear, and execution is necessary." ------Mining Little Penguin

Regardless, the Federal Reserve meeting may be the most critical event determining the future economy. The macro background of the global economy is here, and its impact will continue.

Note: This is the timeline of important Federal Reserve interest rate decisions in the first half of 2022, Eastern Time, please pay attention.

March 15-16. Federal Reserve interest rate decision, press conference, dot plot, economic forecast

May 3-4. Federal Reserve interest rate decision, press conference

June 14-15. Federal Reserve interest rate decision, press conference, dot plot, economic forecast