In the first half of this year, Fed was also criticized for hiring rate hikes for being too late and too small. After three consecutive hikes of 75 basis points, the argument that interest rate hikes are too fast and too fierce began to appear. Many economists are worried that the Fed is trying to correct another mistake with one mistake.
Last month, the Federal Reserve raised the federal funds rate to the range of 3.00% to 3.25%, and the cumulative interest rate hike in the past three meetings was 225 basis points, the fastest rate hike since the 1980s.
Not only that, since the September interest rate resolution was released, Fed officials have revealed on different occasions that the central bank may raise interest rates for the fourth time at its meeting from November 1 to 2, until the interest rate is raised to 4.5% at the beginning of next year.
It is worth mentioning that in previous interest rate hike cycles, the Fed usually prefers a small rate hike so that there is more time to observe the impact of interest rate adjustments on the economy.
Federal Chairman Powell said at a press conference after the September interest rate meeting that the Fed has not tried to trigger an economic recession, but efforts to fight inflation cannot be in vain.
"I hope to achieve this in a painless way, but there is no such way." Powell admitted.
Multiple economists believe that rate hikes are too fast
However, many economists recently pointed out that the Federal Reserve may raise interest rates beyond the necessary level, and under the rapid rate hike, Fed officials have no time to evaluate the impact and effect of continuous policy adjustments on economic activities. The fight against inflation may trigger an unnecessary deep recession, and believe that it is time to calibrate policies more prudently.
Harvard University economics professor Mankun (Greg Mankiw), said the Fed has taken aggressive austerity measures. "The recession is painful for many people. I agree with what Powell said. Some pain may be inevitable, but you don't want to cause unnecessary pain. If it were me, I would slowly release the brakes. This means that if Fed officials argued at a meeting that a 50 basis point hike or 75 basis points, I would support the former rather than the latter."
In addition to teaching at university, Manqun also served as an adviser to the U.S. Congressional Budget Office, the Boston Fed, and the New York Fed, and served as chairman of the Economic Advisory Committee of the former US President George W. Bush from 2003 to 2005.
hedge fund D.E. Shaw Global Economics Director and former Vice Chairman of the New York Fed, Brian Sack, said, "When the Fed has a long way to go, 75 basis points are effective, but when policies need to be calibrated more cautiously, the problem arises, and I believe we are approaching this moment." Nathan Sheets, chief global economist at
Citi , is also worried about the Fed's excessive action, noting that Fed officials are more sensitive to the latest inflation data, "because they completely lose confidence in their ability to predict inflation." But the risk is that inflation is lagging, and a sharp slowdown in economic activity usually delays transmission to inflation indicators.
Shitz gave an example that the wholesale prices of used cars have maintained a downward trend in recent months, but have not been widely reflected in the price index. In addition, the calculation of house prices and rental prices is particularly lagging behind.
Shitz believes that spending a long time waiting for evidence of inflation cooling before slowing down the pace of interest rate hikes means that monetary policy will be restricted, especially the decline in inflation is the goal that the Fed is very confident that it will achieve in the next few months.
In recent times, prices of a series of goods and services, including commodity , freight and housing, have begun to decline. Among them, the housing market, one of the biggest contributors to inflation, has cooled rapidly since the summer. Fed rate hike directly led to the 30-year mortgage rate approaching a 16-year high of 7%, and housing demand fell sharply. Goldman Sachs economists expect that by the end of next year, U.S. housing prices will fall by 5% to 10%.
Mankun said the real estate market does not look optimistic and will eventually spread to other economic sectors, "at some point, a decline in asset prices will lead to the same result," Mankun said. In fact, the US stocks and bonds have suffered double defeats this year, and the mainstream strategy in the investment industry - the 60/40 bond portfolio has fallen by nearly 20% this year.
market still bets on a 75 basis point interest rate hike in November
As of press time, according to the CME FedWatch Tool (CME FedWatch Tool), the probability of raising interest rates by 75 basis points in November is still as high as 78.1%, and the probability of raising interest rates by 50 basis points is 21.9%.
Guotai Junan chief market analyst Jiang Yifan does not believe that monetary policy has the conditions for turning. He said in an interview with First Financial reporter, "The current labor gap in the United States has narrowed significantly, and real estate sales and housing prices have also seen a clear turning point, but strong employment data shows that the labor market will remain strong resilience, and the economy is hard to say in the short term." He expects that the Federal Reserve will raise interest rates by 150 basis points by January next year, of which 75 basis points will be maintained next month.
Senior analyst Joe Perry of Jiasheng Group also told Caixin that the September non-farm report has shattered hopes of turning the currency. "Powell insists that the Fed will sacrifice some of its employment in exchange for cooling inflation, but the rise in interest rates from 0 to 3.25% does not seem to have much impact on the labor market, so the Fed may continue to actively raise interest rates unless inflation suddenly drops."
13, the US September consumer price index (CPI) is about to be released, and investors will have the opportunity to learn about the latest progress in inflation. The market expects that the year-on-year increase of CPI in September will drop from 8.3% in August to 8.1%, and the year-on-year increase of core CPI in September will continue to climb from 6.3% to 6.5%.
Has the Fed been overcorrected?
Now, officials would rather make mistakes in hikes than repeat the mistakes in the 1970s, when consumers and enterprises expected high inflation and prices to continue to rise. However, the Fed has been swaying in fighting inflation and maintaining employment, so that premature easing has led to a resurgence of inflation, soaring to double digits. Until the early 1980s, then-Federal Chairman Volcker (Paul Volcker) had to continue aggressive interest rate hikes, which eventually caused the economy to fall into a serious recession.
Chief economist Diane Swonk of KPMG KPMG said Fed officials spent a lot of time studying the period of major inflation in the 1970s trying to avoid the same mistakes, "but it opened the door to a whole new series of mistakes." Swank believes that both over-sustainment and insufficient tightening pose significant risks. "Risks include sudden responses to interest rate hikes and further slowing economic activity, which will make the situation more difficult to control."
Chief Economic Advisor Mohamed El-Erian also said recently: "The Fed not only needs to overcome inflation , but also restore its credibility. So, yes, I worry that we are most likely to fall into a completely avoidable destructive recession."
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