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Fed “very policy” to deal with “very inflation.” On June 15, the Federal Reserve decided to raise interest rates by 75 basis points, raising the target range of the federal funds rate to between 1.5% and 1.75%; the rate hike at a single meeting was a record since 1994. The Fed’s decision to raise interest rates by 75BP this time was obviously driven by the unexpectedly higher-than-expected inflation data released by the United States on June 10. In May, U.S. consumer prices (CPI) increased by 8.6% year-on-year, exceeding market expectations and hitting a new high since 1982. Inflation in May exceeded expectations, reflecting that U.S. consumer price pressures are still rising, which has a broad impact on American family life; control high Inflation is undoubtedly the top priority of the Fed, and it is also the problem that the Biden administration is most concerned about. The latest announcement that U.S. retail sales fell more than expected in May, and consumer confidence fell to a historical low, reflecting that high prices have already appeared on U.S. household consumption, which is not a good sign for Biden’s midterm elections.
What is the future policy path of the Fed?
Inflation data in May shows that the US price pressure is still increasing, and the Federal Reserve is forced to adopt an aggressive interest rate hike strategy, hoping to produce a tightening effect as soon as possible, reduce some overheated demand, push inflation to peak and fall, stabilize inflation expectations, and prevent US inflation from getting out of control. However, the challenge of the Fed lies in the increased risk of a “hard landing” of the US economy, rising household consumption costs (prices, interest rates), falling household savings rates and uncertainty about the economic outlook, which have seriously dampened US household consumption confidence. In May, the University of Michigan’s consumer confidence The index hit a record low. In April, the U.S. household savings rate fell to 4.4%, the lowest since October 2008. Recently, U.S. real estate, high-tech and other companies plan to reduce employees, and the U.S. consumption outlook has weakened. In recent months, the volatility of U.S. stocks has intensified, and the U.S. bond curve has inverted, reflecting market concerns about the prospect of a U.S. economic recession. Judging from the current trend, the accuracy of the “recession prediction” of the inverted U.S. debt curve is improving.
The Fed’s interest rate decision this time, the meeting expects the federal benchmark interest rate to be at 3.0-3.5% by the end of the year. Based on the current interest rate level, it means that the Fed will raise interest rates by at least 175 basis points for four interest rate decisions in the second half of the year. At the same time, to create a favorable policy environment for the U.S. mid-term elections in November, the Fed tends to “strengthen forward”. The article predicts that the Fed will raise interest rates by 75BP and 50BP in July and September respectively, and raise interest rates at two meetings in November and December. Significantly slowed the rate hike by 25BP. Unless there is a clear sign of U.S. inflation peaking in June, the probability of the Fed raising interest rates by 75BP in July is currently increasing.
Do Fed rate hikes have an effect on inflation?
The Fed’s aggressive rate hikes have limited impact on high inflation. The main reason is that the current round of high inflation in the United States is affected by the imbalance between supply and demand. At the same time, there is a lack of “cooperation” between energy and commodities, and the aggressive shrinking of the Fed’s balance sheet may further lead to the imbalance between supply and demand in the United States.
In recent months, the Federal Reserve has aggressively raised interest rates and reduced its balance sheet, market interest rates have soared, and the financial environment has been significantly tightened to restrain U.S. demand. The demand for the U.S. property market has dropped significantly, and U.S. consumer confidence has continued to decline; U.S. retail sales in May were month-on-month. The U.S. job market showed signs of slowing down.
Imported inflationary pressures increased. Imported inflationary pressure mainly comes from two aspects: on the one hand, the United States has set up trade tariff barriers to push up import prices, and the import price index has continued to increase month-on-month, which is the most direct increase in the cost of enterprises and households; on the other hand, the transmission of production costs of upstream enterprises. At present, the impact of the global epidemic has not been eliminated, the United States continues to face supply bottlenecks, and geopolitical conflicts have led to continuous tight supply of energy, food, industrial raw materials and other commodities. Among them, the energy shortage will have spillover effects on the production cost and supply of other commodities. Increased energy demand, insufficient energy investment and poor global energy trade may offset the increase in energy production by OPEC members. In May, the U.S. industrial production price index (PPI) increased by 10.8% year-on-year. Upstream industrial enterprises have the motivation to pass on cost pressure to mid-stream and downstream end consumers, and the U.S. is facing a thorny inflation problem.
Fed funds rate hikes could dampen supply. The United States has aggressively raised interest rates, the financial environment has tightened, market interest rates have risen rapidly, energy and raw material commodity prices have remained high, and the production costs of industrial enterprises have risen; coupled with high global prices, tightening central bank policies, and geopolitical conflicts, the outlook for global demand has slowed down. It may affect corporate production decisions, curb corporate capital expenditures, and have a knock-on effect, exacerbating the imbalance between supply and demand in the United States.
U.S. stocks continue to face pressure
In the first two rounds of Fed rate hike cycles, U.S. stocks were higher, mainly because the pace of the first two Fed rate hike cycles was slow, and the rate hikes did not materially hinder the U.S. economic recovery; at the same time, U.S. prices were low, the economy continued to recover, liquidity was abundant, and the financial environment remained stable. loose.
However, the high inflation problem faced by the Fed in this round is complicated. The Fed has adopted aggressive tightening policies. The U.S. stock market is facing high uncertainty about the prospects for economic recovery and the tightening financial environment. The outlook for both the face and the policy face is uncertain, and investors lack the necessary grasp.
The real trend reversal for US stocks may have to wait for the Fed’s policy and economic recovery to turn around, that is, the Fed’s policy eases or the US economic outlook improves.
The impact of the Fed’s policy on the world has weakened significantly?
Since the beginning of the year, the Fed has aggressively raised interest rates and reduced its balance sheet, which has exacerbated the volatility of the global financial market. However, from the performance of various markets, the spillover effect of the Fed’s aggressive tightening policy is significantly lower than that of the previous two rounds. Internal problems in these economies, such as the spread of the epidemic, economic slowdown, inflationary pressures, etc. On the whole, the impact of the Fed’s policy on global spillovers is showing a weakening trend. This is mainly because in recent years, the economic structure and trade structure of non-US economies have become more diversified, market demand has gradually been released, and domestic demand momentum has gradually increased; Lessons learned from the financial crisis, non-US economies focus on developing local financial markets, the allocation of foreign exchange reserve assets has become more diversified, and the scale of foreign exchange reserve assets has increased significantly; and non-US economies have also strengthened their ability to respond to financial crises.
However, for a small number of economies with unbalanced economic and financial structures, single economic structure, high degree of external dependence, financial asset bubble risks, and severe twin deficits, we still need to be alert to the tightening impact of sharp policy changes in developed economies.
It is clear that wage growth in the United States may be picking up in the context of a tight job market and a sustained rise in prices across the board. To effectively solve the high inflation in the United States or the dilemma of the Federal Reserve, in addition to reducing some “overheated” demand, it is more important to exert force on the supply side, which requires countries to strengthen coordination and cooperation, smooth shipping logistics, industrial chains and supply chains, and get through global tariffs Barriers and other trade obstructions will promote the recovery of business confidence in global trade and investment and increase global effective supply.
The impact of Fed policy on China
Judging from the domestic and international environment and recent market performance, the Fed’s aggressive interest rate hikes and balance sheet reductions have limited impact on the country as a whole. The main reason is that the Chinese and American economies and policies are in different cycles, and the Fed’s aggressive interest rate hikes have not had a substantial impact on China’s economic recovery, policies, and market liquidity.
The domestic economic prevention and control situation has continued to improve. In response to the impact of the epidemic, China has timely introduced industry and enterprise bailouts, tax cuts and fee reductions, deferred debt repayment, targeted financial inclusion support, commodity supply and stable prices, and precise real estate regulation. A package of fiscal, financial, industrial and other policies has been combined to accelerate the return of production and life to normal. The release of macroeconomic and financial data in May showed that the economy has recovered significantly.
Due to stable domestic prices, stable financial system, independent monetary policy, resilience of my country’s foreign trade, two-way orderly flow of cross-border capital, basically stable balance of payments, and significantly enhanced exchange rate flexibility, the RMB exchange rate continues to fluctuate around the equilibrium level.
The Federal Reserve’s aggressive tightening of interest rate hikes and shrinking of its balance sheet has disrupted the stability of the global financial market to some extent, but positive factors in the domestic stock market have increased. The spread of the epidemic is generally under control, domestic bailouts to help enterprises and policies to stabilize growth have been intensified, domestic demand has accelerated to recover, the economy has bottomed out, the balance of payments has been balanced, prices have been moderate and controllable, policies have remained independent, and market liquidity has been reasonably sufficient; The valuation of the domestic stock market is at a low level both horizontally and vertically, and market confidence continues to improve. The stock market must eventually return to its own fundamentals. From the perspective of domestic medium and long-term fundamentals, financial market development prospects, and the correlation between China and overseas assets, RMB assets are expected to become a safe haven for global funds and have long-term allocation value. Based on the recent market performance, internal and external economy, policy environment and valuation, the domestic market is expected to emerge from an independent market.
(The author is a macro researcher of the Financial Market Department of China Everbright Bank. This article only represents the author’s point of view. The editor-in-charge email: [email protected])