There seems to be no suspense about the decision to raise interest rates on Wednesday. From the perspective of the futures market, it is basically 75 basis points, and Powell will definitely follow the market's expectations.

There seems to be no suspense about the decision to raise interest rates on on Wednesday. From the perspective of the futures market, it is basically 75 basis points (the probability is about 20% to 100 basis points, which can be ignored), and Powell will definitely follow the market's expectations. After this interest rate hike, the U.S. overnight interest rate will enter the range of 3%-3.25%, which is basically flush with the current 10-year interest rate. Even if the 10-year interest rate continues to rise after the interest rate hike, the curve will definitely be flatter.

Another question needs to be considered now, Powell or What is the end point of the Federal Reserve rate hike (4%? or 5%?), as the futures market predicts, will the Federal Reserve stop hiking interest rates or even start to cut interest rates at the beginning of next year?

Those who have followed Powell and analyzed his personality for a long time will know that he has one characteristic, which is that he is not very confident. His lack of confidence comes from three aspects: (1) He is not as good as the former Fed Chairman in terms of education, (2) He bullied him after he came to power, (3) He encountered the new crown epidemic that has not been seen in a century and the high inflation that has not been seen in decades. When he was working, Powell liked to quote history and would occasionally mention "19xx" when he spoke.

It is a good thing to like to study history, especially for investment in the case where "experience + innovation" each account for half of it. It is a very good habit to study history. Quantitative Foundation "backtest", Bridgewater will dedata historical data. Powell is right to look at history, but when he mentions history many times, he feels a little lack of confidence.

Looking at the history of "inflation" in the United States, there is a history that has a huge impact on Powell today, that is, The Great Inflation (Great Inflation) in the United States for 17 years from 1865 to 1882. Inflation in the United States after World War II will basically fall after it emerges. However, during this period, the United States has experienced 17 years of high inflation. In these 17 years, the United States has experienced four economic recessions, two energy crises, and price control , which is only available during wars. This period was also the greatest failure of American macroeconomic policy in the postwar period (Siegel 1994).

Why do you know that this history has a huge impact on Powell at the moment? Because the Wall Street Journal found that Powell highly praised the former Federal Reserve Chairman Paul Volcker, and even speaking, he would quote Volcker's autobiography "Keeping At It”. Volcker’s main political achievement (not discussing right or wrong) is to suppress the 17-year-old U.S. inflation. Although it eventually led to a severe recession in the US economy, inflation also went down.

According to the classic macro curve " Phillips curve ", we can only occupy one end between the two goals of inflation and employment. If maximum employment is guaranteed, inflation will be high; if inflation is required, then unemployment will be high. The curve looks like this.

But during the period of major inflation, the Federal Reserve found that if inflation is allowed to rise, the unemployment rate will eventually rise. Phillips curve will not be a solid A constant curve is a curve that will move up and down. High inflation has become the main goal of the Federal Reserve to deal with. After the 2008 financial crisis, inflation in the world, especially the United States, has remained at a low level, so the Federal Reserve's goal has always been to increase employment. However, employment has been saturated and inflation is high, so the Federal Reserve's goal is to automatically adjust to deal with inflation.

Why did the United States have high inflation for 17 years back then? There are many reasons behind this, artificially and natural economic laws, so I won't expand here. But there is an important lesson, that is, If the time for high inflation is longer, the possibility of inflation falling back will be lower, forming a negative feedback .From a micro perspective, it is "assuming that the bread-making people expect the flour price to continue to rise, then the bread-making people will raise the bread price first; if the landlord expects the bread-making people to increase the bread price, then the rent price will also raise the price." Everyone expects inflation to continue and inflation will become more stubborn. Powell also understands this principle, so he repeatedly said that he should eliminate social inflation expectations.

For Powell, the current goal is to suppress inflation as soon as possible, and at all costs, the longer the time is, the more troublesome it will be. He will never pay attention to the rise and fall of the stock market. And if the market still interprets his dovishness and the market rises, he will be unhappy, because the rise in the stock market will also drive inflation (if the company's stocks rise, the company's capital expenditure will also rise). So neither 4% nor 5% will be the ultimate goal of the Federal Reserve. The Federal Reserve has no final goal. Volcker raised the interest rate to 20% that year.

The Federal Reserve canceled the dot map this time (this thing has never been accurate, I have been talking about it for several years). The purpose is not to give the market any hope of "the end of interest rate hike". Don't want everyone to see the dot map and say, "The Fed will stop if there are 100 basis points left" (because the dot map will give a long-term interest rate hike path). The Fed will dispel any idea of ​​expecting a rate hike to the end - many people have seen that the Fed will cancel the dot chart this time, but no one thinks about the motives behind it.

Another thing to note is that during the 17-year period of major inflation in the United States, inflation has fluctuated up and down many times. The lowest point of the decline has reached 3.7%, but inflation has quickly risen afterwards. I don’t know if the history will repeat this time, but in order to avoid similar recurrences of high inflation, Powell will not dare to relax the interest rate hike even if inflation falls to 3.7%, let alone cut interest rates.

Any idea of ​​expecting the Fed to turn into a dove is false.