U.S. "as promised" rate hike is expected to be difficult to curb inflation
The Federal Reserve raised interest rates for the first time since 2018 to combat the highest inflation in 40 years.
Rising inflation is eating into the economy, and in the event of a wage-price spiral, Powell may have to raise interest rates to levels that would tip the U.S. economy into recession.
The Fed is both anti-inflation and anti-recession, and it will be a very difficult road to get inflation back to target without triggering an economic downturn.
Worried about a wage-price spiral, in order to combat the highest level of inflation in 40 years and to fight against inflation while preventing economic recession, in the early morning of March 17, Beijing time, the Federal Reserve raised interest rates for the first time since 2018. The benchmark fund rate was raised by 0.25 percentage points to a range of 0.25% to 0.5%.
Fed officials expect to raise interest rates to nearly 2% by the end of the year, which means six more hikes by the end of the year, and to around 2.75% by the end of 2023, the highest level since late 2008.
Fed Chairman Jerome Powell also said the central bank could start the process of shrinking its roughly $9 trillion balance sheet as early as its May meeting on interest rates.
That means the Fed is likely to both raise interest rates and shrink its balance sheet at its next meeting.
The U.S. central bank president's hawkishness is really because it is difficult to ride a tiger.
If there was no spoiler in the conflict between Russia and Ukraine, just three weeks ago, the Fed's vision was still a little brighter.
At the time, Powell had begun preparing for a more aggressive round of rate hikes, but he was still banking on a supply chain recovery later this year that would help slow the rate hike.
But now, with the outbreak of the Russian-Ukrainian conflict and a series of sanctions introduced by the United States and the West, energy and commodity prices may rise further, which will push up the transportation and production costs of a series of commodities, thereby further driving up inflation.
External factors that push up inflation are abhorrent, but the state of the U.S. economy itself is the foundation.
The U.S. Labor Department announced that nonfarm payrolls increased by 678,000 in February, and the unemployment rate fell to 3.8%, the lowest level since the outbreak of the new crown pneumonia epidemic in the United States.
Average hourly earnings rose 5.1% in February from a year earlier.
Prices for services excluding energy services rose 0.5% month-on-month, the largest increase since October 1992.
The price of core services rose by 4.4% year-on-year, the highest increase in 30 years.
The climb in service prices suggests that even if Russia ends the war, the pressure from the pandemic eases, and commodity prices fall, the decline in U.S. inflation will be limited.
From this point of view, it is not surprising that the consumer price index released by the US Department of Labor rose to 7.9% year-on-year in February, the highest level since 1982.
The problem with such high levels of inflation is that if price increases are large enough or long enough, consumer and business psychology will change, allowing inflation expectations to cycle into themselves, workers will demand wage increases, and further. Pushing up inflation, workers will further demand higher wages in the face of rising prices, which in turn will cause companies to continue to raise product prices.
In this way, in the absence of new technologies to change the economic ecology, the US economy may eventually fall into stagflation.
Powell believes that since the prospect is so dire, the U.S. economy will be unsustainable.
However, if Powell does not grasp the scale well, he may push the United States into recession at any time and the economy will capsize.
In the face of such high levels of inflation, U.S. retail sales rose just 0.3% in February, and the cost of living rose 0.8% in the same period. Retail sales, adjusted for inflation, actually fell in February.
This shows that high inflation is eating into the economy.
If there is growing evidence of a wage-price spiral, Powell may have to raise interest rates to levels that would tip the U.S. economy into recession.
Getting inflation back to target without triggering an economic downturn is a very difficult road.
Chairman Powell, who had to put on a hawkish mask, was actually quite sullen.
Neither interest rate hikes nor the Fed's stated balance sheet reduction will be effective in curbing inflation in the short term.
As U.S. Treasury Secretary Yellen said on March 10, "inflation data will remain at a very disturbingly high level for the year ahead."
It is not difficult to foresee that the Fed will start raising interest rates under this very entangled mentality, and the effect of curbing inflation will be greatly reduced.
As the world economy shifts from a globalized to a regionalized model, companies will produce and invest more locally to offset the constraints of nationalism and geopolitical pressure on globalized supply chains.
This will increase production costs and the bargaining power of local workers.
And the trend toward an aging population means that rising health care spending, dwindling savings, a growing labor shortage, and rising wages and prices could be a long-term trend.
When the economy moves from the deflationary zone of the past 40 years into the inflationary zone, the Fed chairs who have been around the world like magicians since Greenspan will finally remove their halo.
Guan Jinyong