As inflation levels continue to rise, the Federal Reserve the largest interest rate hike since 1994 has also settled. On the 15th, Eastern Time, the Federal Reserve released the June Federal Open Market Committee (FOMC) statement, which showed that the Federal Reserve raised the federal funds rate target range by 75 basis points to 1.50%-1.75%. But the cost of fighting inflation is that not only the Fed's confidence in the "soft landing" of the U.S. economy has been shaken, but the market's warning that "the United States is about to fall into recession" has also become louder.
The CPI surge in May prompted the Federal Reserve to raise interest rates
After announcing the interest rate hike, Federal Reserve Chairman Powell held a press conference to deliver a speech on the Federal Reserve's decision to raise interest rates. Powell said the latest decision to raise interest rates by 75 basis points was "unusually" large.
This round of interest rate hikes is the third time the Federal Reserve has raised interest rates in half a year. From 25 basis points in March, to 50 basis points in May, and then to 75 basis points, the Fed used a three-level approach to declare to the market its determination to put out the "raging fire" of high inflation. Powell said the Fed was "absolutely determined" to curb expected inflation, with most indicators still showing Americans expect inflation to return to normal in the coming years, but there were some signs of stress.
Ma Wei, an assistant researcher at the Chinese Academy of Social Sciences , told a reporter from the Beijing Business Daily that at last month’s interest rate meeting, the Fed stated that it would not consider raising interest rates by 75 basis points for the time being. This statement was based on the April CPI (Consumer Price Index). Index) has declined compared with the increase in March, with the year-on-year increase falling from 8.3% to 8.1%, and the month-on-month decrease is larger, indicating a downward trend in inflation.
However, on June 10, local time, the US May CPI data released increased by 8.6% year-on-year and 1.0% month-on-month, reaching the highest value since December 1981. Ma Wei analyzed that judging from the 75 basis points increase in interest rates by the Federal Reserve, this inflation level exceeded the Federal Reserve’s previous expectations. Judging from Powell's speech after the interest rate meeting, the Fed's move to raise interest rates was affected by market reaction.
Yue Xiangyu, a researcher at the China Institute of Economic Thought Development at Shanghai University of Finance and Economics, said that the 75 basis points acceleration was within market expectations, and the Fed's dot plot reflects that members are more confident in controlling inflation. When it last announced dot plot , the Federal Reserve expected inflation to be under control in 2023. Inflation will still be high in 2024, and interest rates will be similar to 2023. This time, the Federal Reserve expects inflation to fall significantly in 2024 compared with 2023. In other words, the Fed's expected inflation duration has been shortened from more than two years to more than one year.
Significant interest rate hikes will not become the norm
After the release of US inflation data last week that exceeded expectations, Barclays was one of the first major banks to raise its forecast for a June rate hike by the Federal Reserve to 75 basis points. This expectation was also confirmed in the Federal Reserve's interest rate decision on Thursday.
Now, Barclays predicts that the Federal Reserve will raise interest rates by 50 basis points in July and will not raise interest rates by 75 basis points again. Barclays said, "Although we saw very strong CPI inflation data before the Fed meeting and the possibility of another 75 basis points interest rate increase remains, we still maintain our expectation of a 50 basis point interest rate hike in July."
Regarding the path of subsequent interest rate hikes, Powell said that the rate hike in July may be 75 basis points or 50 basis points, but it is expected that a 75 basis point interest rate hike will not become the norm in the future.
The Fed's statement relieved the market, US stocks also responded with sharp gains in the three major stock indexes. As of the close, the Dow rose 1% to 30668.53 points; the S&P 500 index rose 1.46% to 3789.99 points; the Nasdaq rose 2.5% to 11099.16 points, and the three major U.S. stock indexes all closed higher.
In terms of gold prices, international precious metal futures generally rose. The price of gold futures for August delivery on the New York Mercantile Exchange rose by US$6.1, or 0.34%, to close at US$1,819.60 per ounce.
Yue Xiangyu pointed out that Powell’s statement showed that the Federal Reserve was ready to “do whatever it takes” in policy, so the market believed that the situation was returning to the Fed’s control. This was the reason why U.S. stocks rose instead of falling after this round of interest rate hikes.
"Hard landing" or "soft landing"
Talking about why the Federal Reserve raised interest rates by 75 basis points, Ma Wei said that in addition to market expectations and inflation, it was also affected by the imbalance of supply and demand, the emphasis on the recovery of the service industry and the continuation of the Russia-Ukraine conflict. effects of other reasons. Combined with the great inflation of the 1970s, we can see before and during the event that inflation was not caused by monetary policy, but by external factors such as supply-side factors and geopolitical crises. However, it is still necessary to control inflation afterwards. Relying on the tightening of monetary policy.
The Federal Reserve FOMC said in its monetary policy statement, "After a slight decline in the first quarter, overall U.S. economic activity appears to have picked up. Employment growth has been strong in recent months, and the unemployment rate has remained low. Inflation remains high, reflecting The conflict and related events are creating additional upward pressure on inflation and are dragging down inflation. Global Economic Activity”.
In the future, will the Federal Reserve choose to raise interest rates significantly to control inflation, or will it continue on the current path of moderate interest rate hikes? Ma Wei said that the Federal Reserve is currently facing the dilemma of "cutting off a strong man's arm" and "boiling a frog in warm water". If the Federal Reserve raises interest rates significantly, inflation will definitely be under control, but it will face risks such as a "hard landing" of the economy, a cold economic situation and an impact on employment; if it raises interest rates moderately, there will also be risks of medium- and long-term inflation, which the U.S. economy wants to achieve A "soft landing" is relatively difficult, and a moderate increase in interest rates may lead to a more serious "hard landing" in the U.S. economy in the later period.
Yue Xiangyu also said that raising interest rates will not fundamentally solve the problem. Inflation is closely related to the rising prices of commodity and energy supply shortages caused by the epidemic and the Russia-Ukraine conflict. Raising interest rates only shrinks liquidity and suppresses demand, and cannot increase supply out of thin air. The most fundamental problem still lies in how to solve the supply shortage.
Recently, the trend of U.S. Treasury bond yields also reflects the market's concerns about the U.S. economic recession. U.S. Treasury bond yields have frequently inverted since March, and the 2-year and 10-year Treasury bond yields that have attracted the most market attention also inverted on the 13th. Generally speaking, the longer the Treasury bond maturity , the higher the yield. The abnormal phenomenon in which the yield on long-term Treasury bonds is lower than the yield on short-term Treasury bonds is called an inversion and is often seen as an early warning sign that the economy may be entering a recession.
Powell also expressed uncertainty about whether the U.S. economy can achieve a "soft landing." "It will depend on factors beyond our control, and volatility in commodity prices may take away the possibility of a soft landing," Powell said.
Beijing Business Daily reporter Tao Feng Intern reporter Yuan Zerui
