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LGT Navigator: US Fed announces balance-sheet runoff

April 7, 2022

The Federal Reserve has announced in its March meeting minutes that it will be shrinking its bond portfolio by as much as USD 95 billion a month. By doing so, the Fed reinforced the view that the central bank will tighten aggressively to fight inflation. Equity indices reacted negatively, and the US dollar jumped on an almost two-year peak.

Federal Reserve

After months of debate, Federal Reserve officials rallied around the plan to reduce the Fed's holdings of Treasury bonds (by up to $60 billion monthly) and its Mortgage-backed Security holdings (by up to USD 35 billion monthly) in order to increase long-term interest rates, the minutes said. The amounts should be phased in over three months or more. This planned pace is almost double than the one of the Fed’s “quantitative tightening” in 2017-2019. The FOMC is yet to approve the plan in May but is expected to do so.

The minutes of the Fed's March meeting also showed deepening concern that inflation had spread through the economy, which convinced the policymakers to not only raise the target policy rate by 0.25% from its near-zero level but also to “expeditiously” push it to a “neutral posture”, estimated to be around 2.4%.

Furthermore, the minutes showed that many Fed officials would have opted for a 50 bp hike but dismissed the idea due to the war between Russia and the Ukraine. 

Monetary Fund urges Switzerland to hike interest rates

The International Monetary Fund told the Swiss National Bank to soon begin normalizing its monetary policy, after maintaining the lowest interest rate in the world for some years. “After a long period of very accommodative monetary policy -- a policy rate of -0.75% since 2015 -- the time may be approaching to normalize monetary policy,” said the IMF during its annual review of Swiss economic developments on Wednesday. Economists currently don’t expect a Swiss rate hike prior to mid-2023, contrary to the euro area, which is expected to raise multiple times this year. In its statement, the IMF advises the Swiss National Bank to anticipate higher inflation than in its calculations. “Inflation gaps versus the euro area and the US suggest possible room for nominal franc appreciation to ease inflation pressures.”

Alarming sentiment surveys in China

The Chinese Purchasing Manager Index took a big hit, falling from neutral 50.1 points to 43.9 points in March. This reflects the battered state of the Chinese export industry, suffering under the sustained international logistics problems. But this decline certainly understates the severity of the deterioration of business conditions, as the survey was finished three days before the lock-down of Shanghai in an effort to contain the biggest coronavirus outbreak in a year. The upcoming April numbers will probably reveal an even more pronounced leap downwards. 


Economic Indicators April 7

MEZ Country Indicator Last period
07:45 CH Unemployment rate (March) 2.5%
08:00 GE Industry production (February, m/m) +2.7%
11:00 EZ Retail sales (February, m/m) +0.2%
13:30 EZ ECB minutes
16:30 US Speech of Treasury Secretary Janet Yellen


Earnings Calender April 8

Country Company Period
CH Ems Chemie Q1 2022


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