On August 29, the US dollar index, which measures the changes in the exchange rate of the US dollar against a basket of currencies, broke through 109.4, and once hit 109.48, continuing to hit a new high since the end of 2002.

Shanghai Jiaotong University Shanghai Advanced Finance School Professor Hu Jie told The Paper that due to the conflict between Russia and Ukraine, the European economy has been oppressed by the damage to the energy and food supply chain, resulting in high inflation. However, the ECB is worried that economic growth will be damaged and is slow to move towards hikes . In contrast, the US dollar interest rate has been rising all the way, which has led to the rise in the US dollar against the euro for a period of time. At the same time, the central bank of China lowered the RMB loan interest rate (LPR) and also increased the overall strength of the US dollar. Powell's hawkish statement at the Jackson Hall meeting recently highlighted the hard and soft differences in monetary policies between the United States and Europe, and directly stimulated the rise of the US dollar index.

Cao Yubo, a researcher at the Financial Markets Department of the Head Office of Construction Bank, also told The Paper that last Friday, the "hawkish" speech by Fed , Fed Chairman Powell at the Jackson Hall annual meeting, brought the US dollar's profit, while the market's risk sentiment declined under the strong expectations of tightening financial conditions in major economies, and major stock indexes in various countries fell sharply, and risk aversion sentiment pushed up demand for the US dollar.

What kind of signal did Powell release?

August 26, Federal Reserve Chairman Powell once again "puts out the eagle" in his annual speech at Jackson Hole symposium and said that although the inflation data in July fell, the improvement in the single-month data is far from the level where FOMC can be sure that inflation has declined.

CICC Macro believes that this is correcting the market's expectations of premature celebration of inflation and policy turning into "dove". Regarding the future path to rate hikes, Powell said the Fed will firmly raise interest rates to a sufficiently restrictive policy range to ensure inflation can fall back to 2%. In terms of suppressing demand, Powell described it as a firm, powerful and rapid action, which may mean that interest rate hikes will remain "unstop", and the U.S. monetary policy will remain tighter for some time in the future.

Hu Jie said that Powell's statement at Jackson Hall annual meeting was consistent with his previous expectations, including: US inflation is severe and must be dealt with in a hawkish manner; the US economic fundamentals are acceptable and will not enter a recession this year, and there is still good policy room for financial tightening.

Cao Yubo said that at the beginning of last week, many Fed officials expressed a "hawk" view, but many economic data were not as expected, and investors' expectations for the Fed's subsequent interest rate hike path was repeated, and the US index fluctuated accordingly. The market has expected Powell to make a "hawkish" remark at the Jackson Hall meeting. Although Powell did not give clear steps on the future path of interest rate hikes, he briefly and directly expressed his position on continuing interest rate hikes to control inflation. "Long pain is worse than short pain." He emphasized the determination to control inflation in the future by summarizing three lessons from past monetary policy.

What is the reason why the Federal Reserve continues to "release the eagle"?

Powell also said this time that restoring price stability requires maintaining a restrictive monetary policy for a period of time. History has warned the Fed not to relax its policies "too early".

CICC macro believes that this is equivalent to admitting that inflation is stubborn and it takes more time to "put out" inflation. In addition to the supply shock brought by the epidemic and the "excessive efforts" of previous policy stimulus, the decline in corporate production efficiency and rising unit labor costs are also important reasons for supporting inflation. Taking the second quarter of this year as an example, the total number of new non-farm jobs in the United States reached 1.15 million, while GDP fell by 0.6%, which means that more laborers create less output and labor productivity is declining.

CICC Macro said that in the epidemic environment, enterprises need to spend more resources to ensure employees' health, clean workplaces, stable supply chains, etc. If there is no epidemic, these resources could have been used to create more value production activities, thus bringing higher production efficiency.

CICC Macro pointed out that a decline in productivity means that it is difficult for companies to absorb labor cost pressure, and when companies pass on costs to consumers, it will push up inflation.When the gap between price growth (i.e. inflation) and wage growth narrows, it often indicates that labor productivity growth slows down or even stagnates. At the same time, inflation depends more on the growth rate of unit labor costs, not just the wages themselves. The latest data shows that the growth rate of US core CPI inflation and wages is almost equal, and the growth rate of unit labor costs has also risen rapidly in the past two years, putting upward pressure on inflation.

Hu Jie said that the Fed's primary responsibility is to maintain the stability of the value of the US dollar, that is, to maintain inflation level at 2-3%, and secondly, to both lower the unemployment rate and help economic growth. The United States currently faces high inflation that has not been seen in 40 years, while the unemployment rate is at a low level of 3.5%. The International Monetary Fund expects its economic growth rate to be a relatively healthy 2.3% year-on-year this year, so the top priority is to lower inflation. Although the inflection point of inflation began to appear in July, the downward trend is far from stable and is still at a high level. Therefore, its hawkish posture will last for quite a while.

Cao Yubo also said that in early August, the United States passed the Inflation Reduction Act and will take a number of measures to cool down U.S. inflation. At the beginning of his speech, Powell expressed the reason why he adhered to the "hawkish" stance, that price stability is the responsibility of the Federal Reserve and the cornerstone of the US economy. The growth rate of US CPI declined in July. Although price growth slowed down in some areas, domestic inflation in the United States is still in a rapid upward phase. At the same time, under the current framework of the Federal Reserve's monetary policy, the strong labor market has given the Federal Reserve the confidence to continue to be "hawkish".

There should be too many expectations for interest rate cuts at the moment

Looking forward to the future monetary policy trend of the Federal Reserve, CICC Macro said that the Federal Reserve still has a long way to fight inflation, and advised investors not to over-expect the US currency to return to looseness. There is a view in the market recently that the Fed will slow down interest rate hikes as downward pressure on the U.S. economy increases and start cutting interest rates sometime next year. This kind of idea may be immature. Standing at the moment, you should not have too many extravagant expectations for interest rate cuts. The Federal Reserve is expected to continue hike rates until 2023. If non-farm employment and CPI data perform well in August, it is not ruled out that another hike rate of 75 basis points will be raised at the interest rate meeting on September 22.

Hu Jie also reiterated his view that the Fed will raise interest rates by 50-75 basis points in September, and the probability of 75 basis points is greater. At the same time, the Fed rate hike will continue until the first quarter of next year. The specific rhythm and intensity will be adjusted according to inflation data, etc. In this way, U.S. inflation fell to 5-6% by the end of this year and is expected to drop below 3% by the end of next year.

"Due to the US dollar interest rate hike and the US economy's strength relative to the European economy, the US dollar index will continue to strengthen until the bottom of the first quarter of next year, with a high probability of floating upward between 110-120. As the euro's interest rate hike keeps up, the US dollar index will fall back to the 105-110 range later." Hu Jie said.

Cao Yubo said that in this speech, Powell emphasized that the top priority of the current Federal Reserve's work is to reduce inflation to below 2%, and that the policy will not be relaxed too early based on historical experience. Taking into account the current inflation level, reducing inflation to below 2% will take a long period of tightening, and the pressure on economic growth is inevitable. At the same time, non-U.S. countries, especially European countries, have been disturbed by energy gaps for a long time, and the pressure of economies to fall into recession is greater. The cycle of major European central banks continuing to tighten monetary policy may be shorter. Before the Federal Reserve's monetary policy shows a marginal turn, the US dollar index is expected to run at a high level.

Editor in charge: Wang Jie Photo editor: Jiang Lidong