(Original title: China Merchants Macro Xie Yaxuan: Which three layers should be read out in the minutes of the Fed meeting as “unusual”)
Financial Associated Press, January 8th, the minutes of the Fed’s meeting on interest rates on January 5, local time, China Merchants Macroeconomics Xie Yaxuan’s research report on January 8 pointed out that there are three main “unusual” in the minutes of the Fed meeting:
“Unusual” Fed monetary policy contraction expectations:Some textual statements in the minutes of the Fed’s meeting on interest rates have made investors feel the “unusual” monetary policy tightening expectations. Colleagues from the China Merchants macro team discussed that this is likely to be reflected in the expressions of “early start”, “larger scale”, “faster speed” and so on about the reduction of the balance sheet.
“Unusual” U.S. inflation trends:The latest inflation data shows that in November 2021, the US Consumer Price Index (CPI) increased by 6.8% year-on-year. This is the highest value in 40 years since 1982. Moreover, the upward trend of the US consumer price index will continue at least in the first half of 2022. The current rise in consumer prices in the United States and even the rise in commodity prices in the global sector highlights the inflation trend and pressure that is a deeper “unusual” released by the minutes of this Fed meeting.
Causes of “unusual” inflation:Fed officials still believe that the current unusual inflation is related to the supply shock brought about by the epidemic. The structural factors that have depressed inflation in the past 10 years will also help reduce inflation after the epidemic “returns the king”. Such wishful thinking means that the Fed has actually underestimated the unusual causes of this round of inflation.
In the research report, Xie Yaxuan once again emphasized his views on the “unusual” causes of this round of inflation:
In the past 10 years, the structural factors that have depressed inflation have weakened, and the structural factors that have pushed up inflation have increased. The driving force behind this has been the contraction and expansion of the global financial cycle (GFC).
This change occurred in the second half of 2019 and has nothing to do with the impact of the new crown epidemic. Therefore, the structural factors pushing up inflation will continue to play a role after the epidemic subsides.
The Fed’s current analysis framework does not contain the above information, so it has not and will not take macro-prudential measures to deal with it. In view of this, the financial market will still face the risks of uncontrolled inflation in the United States and further-than-expected contraction of the Fed’s monetary policy in the future.
The original text is as follows:
The minutes of the Fed meeting, which three layers should be read out as “unusual”
On January 5, 2022, local time, the Federal Reserve announced the minutes of the Fed’s previous meeting of seats held on December 14-15, 2021. On the day when the minutes were released, the Nasdaq Index continued to fall significantly by 3.3% on the basis of the 1.3% drop in the previous day. Millions of investors in the stock market have used real money transactions to tell us: The minutes of the Fed’s meeting on interest rates are unusual. The resolutions of the meeting on interest rates were released to the public as early as the half-month meeting ended, and only the minutes of the meeting were announced this time. The Fed Chairman Powell had already informed the market about the gradual reduction of the tapered scale (Taper), interest rate increase and even reduction of the balance sheet. In addition, what kind of “unusual” is there in the text of the minutes of the meeting on interest rates? My general understanding can be divided into three levels, “It is difficult for a person to make money outside of his own knowledge.” Let us see where the consensus lies.
“Unusual” Fed monetary policy contraction expected
Judging from historical experience, the Fed’s monetary policy that meets expectations is often not a decline in the stock market but a rise in the market. Therefore, the stock market where smart people gather has provided us with the first-level answer: some textual statements in the minutes of the Fed’s meeting on interest rates have made investors feel the “unusual” monetary policy tightening expectations. Colleagues from the China Merchants macro team discussed that this is likely to be reflected in the expressions of “early start”, “larger scale”, “faster speed” and so on about the reduction of the balance sheet. In addition, before and after the announcement of the meeting minutes, the Nasdaq Index, represented by growth and relatively high valuation, has fallen more than the Dow Jones Industrial Average, which is dominated by value stocks, which fully illustrates this point. Similarly, the U.S. 10-year Treasury bond interest rate, which is more “smarter” in its fundamentals than stock indexes, rose rapidly from 1.504% on December 30, 2021, to 1.805% on January 7, the high in just five trading days. Shows the expectation of unexpected tightening of the Fed’s monetary policy.
“Unusual” U.S. Inflation Trends
Why did the Fed come to this? Why did the Fed, which is good at communicating with the market, fail to let the market fully understand its policy intentions? The situation is stronger than that of people, and it is the employment and inflation situation in the United States that influence or even determine the behavior of the Fed (of course, asset prices may also become an important factor influencing the Fed’s decision-making at certain times this year). So, is the employment situation or the inflation trend unusual? The latest data show that the US non-agricultural employment population increased by 199,000 after the seasonal adjustment in December 2021, the smallest increase since January 2021, which is not as good as market expectations. The unemployment rate recorded 3.9% in December, which is the lowest since February 2020. The supply shock brought by the new crown epidemic has depressed the labor force participation rate in the United States. This is not news. The strong contagiousness and low destructiveness of the Omi Keron variant seem to have been accepted by the market. The information from the economic growth and employment levels is not “Thriller”. The latest inflation data shows that in November 2021, the US Consumer Price Index (CPI) increased by 6.8% year-on-year. Judging from the chart provided to me by my colleague Gao Ming in the macro team of China Merchants, this is the maximum value in 40 years since 1982. Moreover, the upward trend of the U.S. consumer price index will continue at least in the first half of 2022. It is once in 40 years, which is considered “unusual.”
On January 5, 2022, the U.S. Commodity Survey Bureau (CRB) spot composite index read 583.87, which is the record high of the index in 75 years since its creation in 1947. The last high occurred in April 2011 when China launched the “4 After the “trillion” stimulus policy, the reading was 580.32. In 2021, the CRB spot composite index rose by 30.3% year-on-year, which was the fourth largest increase since 1947. An average of 11 years is enough to call it “unusual.” The year-on-year growth rate of the PPI in the United States and even major economies is closely related to the CRB spot composite index. It can be seen that the current rise in consumer prices in the United States and even the rise in commodity prices in the global sector highlights the inflation trend and pressures that are the minutes of this Fed meeting. The release of a deeper layer of “unusual”.
Causes of “unusual” inflation
More important is the Fed’s analysis of the causes of current inflation. This layer may not be the focus of most analysts, but it is actually a key point that affects the future: if the Fed has a clear and accurate understanding of the causes of inflation and the measures taken are effective and effective, then the possibility of future inflation and monetary policy tightening further than expected If the Fed still does not fully grasp the causes of this round of inflation, it will easily continue to underestimate future inflationary pressures, and will have to adopt more stringent monetary policies when inflation is further out of control. The possibility of measures rises, and the risk of negative impact on the market is still accumulating.
Chart: Changes in the annual absolute value of the CRB spot composite index since 1948
The Fed still underestimates the risk of future inflation
Judging from the meeting minutes, has the Fed accurately grasped the “unusual” causes of this round of inflation? Unfortunately, the answer is no. It can be seen from the minutes that although Fed officials have adjusted the risk of future inflation to an upward (out of control) direction of inflation, and although they have expressed concerns that inflation expectations have begun to be unstable, some officials still believe that “inflation has been reduced in the past 10 years. The structural factors, such as technological progress and demographic factors, will come back after the epidemic subsides and continue to play a role in suppressing inflation.” In short, Fed officials still believe that the current unusual inflation is related to the supply shock brought about by the epidemic. The structural factors that have depressed inflation in the past 10 years will also help depress inflation after the “return of the king” after the epidemic. Such wishful thinking means that the Fed has actually underestimated the unusual causes of this round of inflation. Former U.S. Treasury Secretary Summers is an authority who put forward the “Long Term Stagnation Theory”, using structural factors such as population to explain the global fall into a state of “low growth, low inflation and low interest rates” in the past 10 years.
It was Summers who pointed out in September 2021 that “the history of 1970 (high inflation) is repeating itself in the United States”, and in December he criticized that “the Fed has changed its course on the surface and actually still maintains a “temporary theory” of inflation.” January 7, 2022 Japan once again emphasized that “the Fed and the market still underestimate the difficulty of fighting inflation.”
After reviewing the minutes of the Fed’s meeting from 2001 to 2008 in the article “How the Fed Views the Rising of Commodity Prices” on August 13, 2021, I thought: “In view of the past, although the increase in commodity prices since the end of April 2020 has Very significant… The Fed will still choose to ignore the rise in commodity prices, emphasize the temporary nature of employment and inflation, highlight the negative supply shocks of commodity prices, avoid discussing asset prices, and will not adopt politically incorrect measures. International monetary policy coordination measures. It can be expected that the Fed will not listen carefully to the early warning signals released by the rise in commodity prices, and will once again be behind the curve.”
Figure: The new round of global financial cycle expansion phase began in the second half of 2019
I once again emphasize my views on the “unusual” causes of this round of inflation:
In the past 10 years, the structural factors that have depressed inflation have weakened, and the structural factors that have pushed up inflation have increased. The driving force behind this has been the contraction and expansion of the global financial cycle (GFC).
This change occurred in the second half of 2019 and has nothing to do with the impact of the new crown epidemic. Therefore, the structural factors pushing up inflation will continue to play a role after the epidemic subsides.
The Fed’s current analysis framework does not contain the above information, so it has not and will not take macro-prudential measures to deal with it. In view of this, the financial market will still face the risks of uncontrolled inflation in the United States and further-than-expected contraction of the Fed’s monetary policy in the future.
On July 29, 2021, Howard Marks, the founder of Oaktree Capital, published a memo entitled “Thinking about Macro Issues”. After spending two-thirds of the space expressing his consistent distrust of economists, he proposed: “You It is unpredictable, but you can take precautions. “In order to deal with inflation risks, it is reasonable to make some small adjustments.” If you compare investment to a bet, when you might have guessed the Fed card, which side would you bet on? The trend of U.S. stocks and U.S. bonds on January 5, 2022 is the direction choice for smart investors.
January 8, 2012