Anxious Fed, forced to raise interest rates again

[Review of the United States] The anxious Fed is forced to raise interest rates again

　　Zhongxin Finance, June 17 (Gong Hongyu) In the United States, where prices are soaring, not only ordinary people, but also the Federal Reserve, which has tried every means to control inflation, has "failed repeatedly".

　　After two interest rate hikes in 2022 were not very effective, in June, the Federal Reserve, which had no way out, began to "strike dangerous moves."

On the 15th local time, the Federal Reserve announced that it would raise the target range of the federal funds rate by 75 basis points to between 1.5% and 1.75%.

　　The figure also set a record for the largest single rate hike by the Federal Reserve since November 1994, drawing global attention.

Data map: Federal Reserve Chairman Powell.

Photo by China News Agency reporter Sha Hanting

The attacking Fed is facing a "chicken feather in one place"

　　When talking about the reasons for the sharp rate hike, Fed Chairman Powell emphasized that rising inflation expectations are an important factor.

In addition, monetary policy will remain flexible, which is the reason why it chooses to raise interest rates more significantly, and it will also be the purpose of the Fed's choice of interest rate hike path in the future.

　　But the truth is far less benign than Powell describes.

Data showed that US prices rose more than expected in May, and the consumer price index (CPI) reached 8.6%, hitting a new high in 40 years since March. The US inflation crisis is fermenting and out of control, and public grievances are intensifying.

　　In response to the inflation dilemma, on May 31, US Treasury Secretary Yellen admitted that her past views on the direction of inflation were wrong. Chain bottlenecks severely impact the economy.

　　As for the Fed, in order to quell inflation, the rate hike was 25 basis points in March, 50 basis points in May, and 75 basis points in June.

It is not difficult to see from this string of figures that the Fed's relatively moderate and steady interest rate hikes have been unable to cope with the deteriorating prices in the United States.

　　Wen Bin, chief researcher of Minsheng Bank, analyzed that the main reason for this round of inflation is the supply-side shock, and the tightening monetary policy has limited effect in curbing inflation in the short term.

Therefore, the Fed can only suppress the demand side and change people's inflation expectations in the future.

　　According to He Ning, an analyst at Huaan Securities, the U.S. will hold mid-term elections this year, and whether it can effectively control inflation will be a key achievement of the Biden administration. Political pressure from the White House further increased its austerity pressure.

　　Therefore, although raising interest rates will bring more uncertainty and risks to the U.S. economy, the Federal Reserve will have no choice in the face of the inflation crisis.

The frequent failures to curb inflation also put the Fed in the middle of a storm of public opinion.

　　Cui Rong, chief overseas macroeconomic analyst at CITIC Securities Research, previously mentioned that the Fed's misjudgment of the inflation situation has led to the failure of its forward-looking guidance of raising interest rates by 50 basis points in June and July. The media has made the market form higher interest rate expectations, and its credibility is gradually drifting away.

Data map: A supermarket in the United States has set up glass partitions between cashiers and customers in the checkout area to prevent mutual infection.

Photo by China News Agency reporter Sha Hanting

Is the U.S. economy in a "dead end"?

Experts:

　　After the CPI was announced in May, the talk of a recession in the U.S. economy has never stopped.

For example, on June 13, Morgan Stanley CEO James Gorman (James Gorman) warned: "As the Fed fights inflation more aggressively, the probability of a recession in the United States is rising. In the past, I predicted that the risk of recession is 30%, and now I've increased that probability to 50%."

　　At a press conference on the 15th, Powell also responded to whether the US economy will decline.

But he always stressed that there were no signs of an economic slowdown.

　　However, Cui Rong said that the Fed's Summary of Economic Expectations (SEP) contradicted Powell's statement.

SEP shows that the US economic growth forecast in 2022 has been significantly lowered to 1.7%, which is lower than the potential US growth rate for the first time.

　　Cui Rong analyzed that a series of situations are indicating that the US economic recession is gradually approaching.

"It is difficult for the Fed to stop raising interest rates before inflation has slowed significantly, and there is

."

　　Zhong Zhengsheng, chief economist of Ping An Securities, also believes that the current U.S. and global inflation situation is still severe, and the Fed and the market seem to be making "the worst plan", thinking that it may be appropriate to raise interest rates to around 3.5% this year.

　　Wen Bin believes that as the Fed continues to raise interest rates and shrink its balance sheet, it may lead to an increase in unemployment, the U.S. economy is at risk of falling into stagflation, and monetary policy will also face a dilemma.

　　In terms of U.S. stocks, He Ning pointed out that under the continuous and rapid rate hike by the Federal Reserve, U.S. stocks will face the dual pressures of U.S. economic growth and the Fed's continued interest rate hikes.

On the one hand, the U.S. economic growth will continue to slow down under the continuous raising of interest rates, and the earnings expectations of U.S. stocks will face greater pressure; on the other hand, there will be greater pressure on the valuation of U.S. stocks.

Therefore, U.S. stocks are currently facing greater downward pressure, and their volatility may also increase.

　　Recently, U.S. stocks have continued to decline.

After the rate hike was implemented on the 15th, the three major U.S. stock indexes rose collectively at the close.

The Dow Jones Industrial Average rose 1.00%, the S&P 500 rose 1.46% and the Nasdaq rose 2.50%.

　　"After the uncertainty has landed, the U.S. stock market may usher in a phased respite, but the subsequent market-leading logic may turn to economic recession, and profit suppression may still be negative for U.S. stocks." Cui Rong analyzed.

　　In terms of U.S. bonds, in He Ning's view, the current 10-year U.S. bond yield of around 3.4% has already reflected the Fed's more aggressive path of raising interest rates and shrinking its balance sheet. rate or remain high and volatile.

Data map: New York, USA.

Photo by Zhongxin Finance and Economics Gong Hongyu

How will the Fed raise interest rates in the future?

　　The Fed emphasized in the meeting statement that it will be firmly committed to returning inflation to its 2% target.

This shows that in order to curb inflation, interest rate hikes will undoubtedly continue.

But Powell claimed that raising interest rates by 75 basis points is not normal, but for now, there is a high probability that the next meeting will still raise interest rates by 50 basis points or 75 basis points.

　　In Cui Rong's view, the high oil and food prices, the surge in summer travel demand and the unabated growth rate of residential projects may lead to the year-on-year growth rate of the U.S. CPI in June still at a high level of around 8.5%, and U.S. inflation in the third quarter may still be at the top Therefore, it is expected that the Federal Reserve may continue to raise interest rates by 75 basis points at the interest rate meeting in July, and the end point of interest rate hikes during the year may be around 3.25%.

　　He Ning also believes that the possibility of a 75 basis point interest rate hike by the Federal Reserve cannot be ruled out from July to September, and the specifics will be determined according to the inflation situation.

Some emerging economies need to be wary of recession risks

　　Regarding the impact of interest rate hikes on the global market, Wen Bin said that the tightening of the Fed's monetary policy has brought spillover benefits, aggravating the volatility of the international financial market, and the continuous strengthening of the US dollar index, causing some emerging market economies with fragile economic structures to face economic recession and currency depreciation. and the risk of a debt crisis.

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