The Fed faces tougher challenges ahead

On June 15, the Federal Reserve announced the results of its latest monetary policy meeting, approving a 75 basis point interest rate hike, the largest one-time increase in nearly three decades. At the press conference, Fed Chairman Jerome Powell said inflation had risen unexpectedly since the May meeting. In response, the Fed decided to raise interest rates sharply. The next meeting should be 50 basis points or 75 basis points, and the decision to raise rates by 75 basis points should not become the norm. According to the decision of the last meeting, the Fed began reducing its balance sheet from June 1 and planned to reduce its asset holdings by $47.5 billion each month, which would drop to $95 billion after three months. . The market had already anticipated that the Fed might proceed with aggressive interest rate hikes, and that is exactly what happened, showing its determination to curb inflation in the short term. For this reason, some analysts believe this will help restore market confidence in US monetary policy. However, many are worried about whether the United States will drag the global economy into a recessionary quagmire due to the aggressive tightening policy, adding to the increasingly pessimistic global economic outlook.

ANBOUND researchers are of the view that the Fed’s unconventional tightening policy aims to resolve its post-pandemic easing policy and make up for last year’s policy mistakes where it claimed inflation was ” transient”. At the same time, in the context of the “politicization” of the inflation issue, his intention is to coordinate with the “midterm elections” of the Biden administration, in order to avoid that the Democratic Party lose votes due to uncontrollable inflation. . Controlling inflation has become the Fed’s primary policy objective right now, even as the economy cools. If the Fed has made a choice between controlling inflation and maintaining growth, this does not mean that the contradiction will disappear. Instead, it will bounce back like a seesaw, and the future will face more serious challenges.

Powell said the next meeting should be 50 or 75 basis points, and 75 basis points of interest rate hikes should not become the norm. The pace of rate hikes will depend on future data. The federal funds rate is expected to be raised above 2.0% and below 3.0% by the end of summer 2022. It is hoped that by the end of 2022, federal funds rates interest may be increased to a restrictive level of 3.0% to 3.5%. The dot chart shows that Fed officials expect the benchmark rate to rise to 3.4% by the end of this year and 3.8% by the end of 2023. In line with this unexpected rate hike, the Fed has already started reducing its balance sheet in June. This “double tightening” policy will not only impact US and global capital markets, but will also inevitably affect US economic demand. Regarding the risk of a recession in the United States, Powell believes that after a slight decline in the first quarter, overall economic activity seems to have recovered and that demand from the economy is still in full swing. . He said that the Fed will not try to cause a recession in the United States at this time and that the US economy is well prepared for the FOMC to raise interest rates, adding that real GDP growth is slowing down. is accelerated in the second trimester. He noted that there is no progress on lowering inflation, although the Fed would like to see signs of that. Powell also said that wages are not responsible for the current high inflation in the United States and that there is no wage-price spiral.

Powell remains confident in the US economy. Indeed, judging by employment and other data, US economic growth remains healthy. However, the US capital market has started to show signs of adjustment. Not only did US equities decline, but the bond market also fluctuated, leading to a sharp rise in government bond yields with benchmark significance. At the same time, the real estate market, which performed well after the pandemic, will also be affected by the sharp rise in interest rates, and there are signs of “topping”. These economic and financial changes, along with falling consumer demand caused by high inflation, mean that the outlook for the US economy is not as rosy as Powell had painted it. Rising interest rates and shrinking the balance sheet too quickly will inevitably have a significant inhibiting effect on the US economy. Even if economic growth does not fall into recession, it will decline with falling inflation, which will intensify contradictions such as debt, investment and distribution.

At the same time, Powell mentioned that the Fed will carefully study why US inflation is “stubbornly high”, indicating that the Fed’s aggressive interest rate hike policy may have limited effect on containing the economy. short-term inflation. Deep-rooted inflation has both demand and supply-side structural factors, meaning that after the level of inflation declines, it will remain above the Fed’s 2% target for some time. Therefore, as the Fed’s roadmap shows, the pace of rate hikes won’t stop anytime soon, and could continue to increase until the midterm elections. and the downward trend in the economy, the dilemma facing the Fed going forward has become more important.

The Fed’s monetary policy “overshoot” will not only have a huge impact on the US economy, but will also drag global central banks into monetary policy tightening, which is sure to hurt the global economy. . Some media reported that at least 60 central banks around the world took tightening measures before the Fed or followed it during the year, while some also adopted several rounds of interest rate hikes. . Many economists have warned that the recent wave of rate hikes is just the start of a global tightening cycle. In Europe, Japan and others, global financial conditions will need to tighten further in order to reanchor inflation expectations. ANBOUND researchers pointed out that pending policy tightening from global central banks, economic growth will decline along with a decline in inflation from a high level, and a new coexistence equilibrium. of weak growth and moderate inflation is likely to occur. It should be noted that the current global economic, trade, financial and monetary environment is undergoing drastic changes and it would be difficult for future development to return to the “normal” pre-pandemic pattern, which will exacerbate the tendency to the global economic crisis. fragmentation.

Conclusion of the final analysis

The Federal Reserve’s tightening policy means that it has made a “politicized” choice between controlling inflation and maintaining growth. This will inevitably affect the United States and the global economy. This means that there will be more significant contradictions in the future. Thus, a change of government in the United States cannot be ruled out due to the failure of sharp interest rate hikes.

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