Fed officials voted on the 16th to raise the target range for the federal funds rate by 25 basis points to between 0.25% and 0.5%. It was the first rate hike by the Fed since December 2018.
The small adjustment is seen as a sign of a major shift: the Fed has fully shifted to inflation-fighting mode and will take more aggressive measures in the period ahead. But the question is, can the Fed's tightening of monetary policy really alleviate the rare high inflation in the past 40 years? What impact will its future interest rate hike path have on the US economy and global markets?
Doubtful path to rate hikes
For a long time, as the formulation institution of US monetary policy, the Federal Reserve shoulders a dual mission: maximize employment and stabilize prices.
In the past two years, in response to the impact of the pandemic, the Federal Reserve has fired almost all its bullets from interest rate cuts to quantitative easing, finally turning the US economy and job market into a safe place.
However, in the past year, due to factors such as the impact of the pandemic on the supply chain, prices in the United States have soared, and the inflation rate has soared to 7.9%, a record high in the past 40 years. The Fed's long-term inflation target of 2 percent has been wiped out, but for a long time it has insisted that inflation is only "temporary." Today, the supply bottleneck has not yet recovered, and the conflict between Russia and Ukraine has added fuel to the fire.
What should the Fed do? The outside world expects that the regular monetary policy meeting on the 15th to 16th will give an answer.
According to a statement issued by the Federal Reserve on the 16th, it assessed the current situation as follows: Economic indicators and employment data continue to strengthen, but inflation remains high, and the situation in Ukraine brings high uncertainty to the US economy, which may cause additional inflation and economic growth. activity pressure.
According to the latest outlook report released on the same day, its view on the economic outlook for this year is slightly more pessimistic than before: the inflation rate is expected to be raised to 4.3% from 2.6%, and the economic growth rate is expected to be lowered to 2.8% from the previous 4.0%.
On this basis, the Fed gives the following monetary policy opinions.
First, when the interest rate hike boots land, first add 25 basis points (not 50 basis points), so as not to trigger a sharp adjustment in the financial market.
Second, it is expected that there will be 6 interest rate hikes this year, which is equivalent to raising interest rates at every remaining regular meeting, and the frequency is higher than expected.
Third, there are still differences on the path of future interest rate hikes. Officials at the meeting agreed that the interest rate is expected to rise above 1.25% this year, but some officials proposed that it could rise to a high of 3% to 3.25% this year.
Fourth, it plans to finalize a plan to shrink its $9 trillion balance sheet in May, and then start the process.
Against the background of the unresolved pandemic, high inflation and extremely uncertain geopolitical environment, the Fed's rate hike this time is relatively modest, basically in line with outside expectations. The reason for disagreement on the path of interest rate hikes is that the Fed generally considers future interest rates based on factors such as inflation targets and economic growth. Right now, while the inflation target is set, US economic growth is uncertain. After the Russia-Ukraine conflict, the market has lowered its growth forecast. With the further advancement of sanctions and counter-sanctions in the future, there may be more negative impacts on the US economy. Once the economic growth slows down, the Fed may appropriately reduce the number of interest rate hikes.
Will the US stagnate?
As the dust of the Fed's regular meeting settled, foreign media turned their attention to the American people, trying to interpret what the interest rate hike would mean for ordinary people.
According to the basic logic, raising interest rates is equivalent to rising borrowing costs, and interest rates on credit cards, car loans, housing loans, and commercial loans will all increase. As a result, potential buyers may shun the market, reduce spending, supply may become more abundant, price increases may be suppressed, and high inflation is expected to ease.
But the problem is that people are worried about the possible negative effect of raising interest rates - stagflation, that is, commodity prices are still high, but the US economy is in recession.
"Historically, all rate hike cycles with an inverted yield curve (short-term government debt rates exceeding long-term debt rates) have seen a recession within one to three years," said Jim Reid, research strategist at Deutsche Bank. The yield curve is flattening, and late 2023 or early 2024 will be a high-risk period.
A CNBC survey this week put the chance of a US recession in the next 12 months at 33 percent, up 10 percentage points from the Feb. 1 survey.
As interest rate hikes start, the possibility of stagflation in the US economy does exist
First, inflation exists objectively, and it is impossible to change immediately with the increase in interest rates and the start of the shrinking of the balance sheet. The US$4.5 trillion in currency released by the Fed in the past two years is too large, and the policy contraction requires a process, and prices will remain high for a period of time.
Second, the US economic growth is facing greater difficulties. It has largely relied on consumption to stimulate growth, and production has yet to return to pre-pandemic levels. Consumption stimulus and fiscal expansion policies are closely linked. Now, the Fed is starting to tighten policy, which will hit consumption. The US government is limited by factors such as inflation and costs, and it is impossible to expand spending all the time. In this case, the US economic growth will slow down. Whether there will be a recession also depends on the trend of the global economy and whether technology companies can provide support. In the medium term, if the economy declines, the United States will fall into stagflation.
"The United States has difficulties in curbing inflation and promoting growth." Lian Ping believes that the Fed's judgment that "inflation is only a phase" in a period of last year may have some deviations. But the problem now is that it is unrealistic to bet all the "treasures" of curbing inflation on monetary policy. Overly loose monetary policy is only one of the reasons because of inflation. The imbalance between supply and demand and insufficient supply caused by the epidemic also cannot be ignored. To deal with it completely with monetary policy tools seems to be a bit of a misnomer.
Global spillovers
Looking back at history, the rate hike cycle has always been a vulnerable point for the market. There are comments that the Fed sneezes, and the global market may be "shocked". Wall Street has historically disliked rate hikes because it discourages companies from investing in new projects to grow their businesses. When interest rates rise, stocks tend to fall.
However, after the news of the rate hike on the 16th came out, U.S. stocks initially reacted negatively, but then rose sharply. Yields on both the 10-year and 2-year Treasury notes rose significantly.
Analysts believe that the US monetary policy has a certain degree of transparency, and the interest rate hike has been talked about for half a year. The pressure and confusion it brings to the market have basically been digested. So, there wasn't much of a stir.
But in the longer run, "changes in the Fed's monetary policy will have spillover impacts on other countries and the global market." Xu Mingqi pointed out.
First of all, from the perspective of capital flow, Xu Mingqi believes that with the Fed raising interest rates and the end of the global monetary easing cycle, funds may be withdrawn from developing countries and emerging markets. Global financial markets are turbulent, and these countries will face pressure. There may be situations such as falling exchange rates, shrinking stock markets, and bursting asset bubbles, which will adversely affect their economies.
Where did the outflow capital go? Due to the serious bubble in the US stock market, under the influence of risk aversion, funds flowing out of developing countries may not return to the US, but more to the commodity market, which in turn drives up the prices of commodities such as energy, grain and non-ferrous metals. Large financial institutions have information advantages and are often prone to speculative profits. But the vast majority of small and medium-sized enterprises and developing countries may be severely impacted. "From this perspective, the United States actually uses the special status of the U.S. dollar to relieve its own pressure and pass on the cost of domestic policy adjustments abroad." Xu Mingqi said.
Lian Ping specifically mentioned that in the process of the Fed raising interest rates, not only developing countries are under pressure, but European countries are also facing a policy dilemma. On the one hand, Europe has close economic ties with the United States, but its growth rate is not as good as that of the United States; on the other hand, most of the negative effects brought about by the conflict between Russia and Ukraine fall on Europe, with soaring oil prices driving up its inflation. Monetary policy is tight or loose, testing Europe. If the Fed raises interest rates more aggressively, European capital may flow to the United States on a large scale, which will make Europe worse.
Secondly, from the perspective of debt risk, there are comments that in the case of the high debt of the US federal government (which has exceeded 30 trillion US dollars), raising interest rates may not only increase the risk of US debt, but also increase the repayment of US dollars by emerging markets and developing economies. The cost of debt, thereby triggering the risk of global debt default.
Finally, from the perspective of China, the two analysts believe that if foreign capital is withdrawn in a concentrated manner in the short term, it will inevitably cause certain fluctuations in the domestic market, but it will not cause too much trouble.
"Unlike most emerging market countries, our financial market has a huge scale, stronger policy control capabilities, and the overall balance of payments maintains a high surplus." Xu Mingqi said that the trend of foreign capital will not impact the entire financial system. Recently, the exchange rate of RMB (6.3565, 0.0106, 0.17%) has remained relatively stable, and the "herd effect" of large-scale capital outflows is unlikely to occur in China. Financial regulatory authorities will issue policies based on changes in the situation to consolidate and enhance market confidence.
Lian Ping believes that the impact has already appeared before. As the Fed raises interest rates, the renminbi will depreciate to a certain extent, and there will be a certain degree of capital flight. The factors behind it are complex, and the Fed rate hike is one of them. However, the impact of this capital flow on China's capital market is still controllable and limited.
First, foreign capital accounts for a very small proportion of China's A-share market value (only about 2%), making it difficult to make waves in the market. Second, the RMB exchange rate is still relatively stable, with a slight depreciation recently, but the appreciation rate was not small in the previous period. These conditions indicate that the RMB exchange rate is still strongly supported by China's economic fundamentals and the double surplus in the international balance of payments, and there may be periodic depreciation pressures, but it will generally remain stable for a period of time in the future.
It is worth mentioning that "now, the world's major economies have a high degree of internationalization, and the difficulties encountered by some countries may also be indirectly transferred and transmitted to other countries, which may affect China's economy, as well as the United States." Lian Ping reminded.
