Will the Fed's largest rate hike in 28 years help the economy achieve a soft landing?

(Finance and Economics) Can the Fed raise interest rates by the most in 28 years, can it help the economy achieve a soft landing?

　　China News Service, Beijing, June 16 (Reporter Xia Bin) In the early morning of the 16th Beijing time, the results of the Fed's June interest rate meeting were officially announced, and it decided to raise the target range of the federal funds rate by 75 basis points to a level of 1.5% to 1.75%. , which was the largest single rate hike by the Fed in nearly 28 years.

　　"This sharp interest rate hike is the Fed's response to the U.S. inflation data in May." Zou Ziang, a researcher at the Bank of China Research Institute, pointed out that the U.S. CPI rose 8.6% year-on-year in May, a new high since 1981, announcing that U.S. inflation will be held at the June interest rate meeting. Hopes of the previous peak were dashed.

This means that the Fed needs to take more "hawkish" measures at this meeting to restore the serious consequences of underestimating inflation.

The Fed raised interest rates by 75 basis points this time, which is largely a passive revision of the previously underestimated inflation.

　　Under the double attack of high inflation and sluggish growth, can sharp interest rate hikes help the US economy achieve a soft landing?

What needs to be seen is that the Fed's judgment on the future trend of the US economy has changed.

Compared with the forecast value in March 2022, the Fed's economic forecast summary has lowered its economic growth forecast, reducing the US GDP growth rate in 2022 from 2.8% to 1.7%.

　　In addition, inflation expectations have also been significantly raised, raising PCE inflation from 4.3% to 5.2% in 2022, while raising core PCE inflation from 4.1% to 4.3%.

The unemployment rate forecast was raised slightly, raising the unemployment rate to 3.7% in 2022 from 3.5%.

Significantly raised the federal funds rate expectations, raising the federal funds rate from 1.9%, 2.8%, and 2.8% to 3.4%, 3.8%, and 3.4% in the next three years, respectively.

　　Zou Ziang said bluntly that the economic forecast summary has lowered the economic growth forecast, and the variables of the soft landing of the US economy have increased.

The above adjustment also means that in the second half of 2022, the Fed will raise interest rates by about 175 basis points.

On the whole, although Federal Reserve Chairman Powell expressed confidence in the soft landing of the US economy, the overall situation reflected in the economic forecast data is more severe than that at the end of the first quarter.

　　Huang Wentao, chief economist of China Securities, pointed out that with the downward pressure on the economy in the second half of the year, once the job market also deteriorates, the pressure on Powell will increase significantly, and the test of the policy stance will come.

The Fed still believes a soft landing is possible, but stagflation is unavoidable.

But neither stagflation under a soft landing nor recession under a hard landing can change the logic of the continuation of short-term high inflation and tough tightening.

　　Cheng Shi, chief economist of ICBC International, specifically mentioned that from the 1970s to the early 1980s, the United States suffered two consecutive oil crises, which led to the end of the Bretton Woods system, and the economy fell into a "stagflation" whirlpool.

Volcker, then the chairman of the Federal Reserve, adopted a policy of higher-than-expected interest rate hikes, which effectively contained the unexpectedly higher-than-expected inflation.

　　He bluntly said that this time, the "Volcker moment" reappeared, and the Federal Reserve announced a 75 basis point interest rate hike.

On the whole, this meeting conveyed a number of messages. First, the monetary tightening policy is increasing.

The second is to raise interest rates and shrink the balance sheet together, and the tightening effects are superimposed on each other.

The third is to further establish the "stagflation" state, with full forward-looking and flexible response.

　　What is the impact of the Fed's sharp interest rate hike?

Cheng Shi reminded that with the intertwining of slowing economic growth expectations, high inflation expectations, and extraordinary interest rate hike expectations, the "Volcker moment" reappeared yesterday, which will have a profound impact on the global economy and finance.

The monetary tightening policy spread from the United States to the euro area, the monetary stance of the European Central Bank was adjusted to a neutral level, and the era of global negative interest rates will also come to an end.

In the short term, we still need to be wary of the accelerated rate hikes and balance sheet reductions, resulting in drastic fluctuations in the economic and financial markets.

　　Wen Bin, chief researcher of Minsheng Bank, believes that the tightening of the Fed's monetary policy has brought spillover benefits, aggravated the volatility of the international financial market, and the dollar index has continued to strengthen, causing some emerging market economies with fragile economic structures to face economic recession, currency devaluation and debt crises. risk.

　　"At present, my country's inflation is moderate and controllable, and there is still room for monetary policy. At present, we should continue to play the dual functions of monetary policy tools in terms of total volume and structure, encourage and guide financial institutions to continue to increase support for the real economy, and effectively reduce the financing cost of the real economy. ." Wen Bin said.

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