Has Powell spoken out?Is the Fed going to raise interest rates again?
On August 25th,Federal Reserve Chairman Powell publicly stated that the Fed might take further interest rate hikes to reduce the currently high inflation rate in the United States.He later held a meeting,indicating that he would act cautiously,and this so-called action refers to "raising interest rates."
It was agreed not to raise interest rates,so why does the Fed repeatedly go back on its word?
As the de facto "central bank" of the world,the Fed's exchange rate policy has a significant impact on all countries,especially China,which has a close trade relationship with the United States.China is also greatly affected by the exchange rate and foreign trade due to U.S.interest rate hikes.
Due to the close attention of China and countries around the world,as well as taking practical actions to sell U.S.debt,the Fed has repeatedly indicated since the end of last year that it will start to stop raising interest rates this year and may even gradually lower interest rates to cope with the continuously declining global economy.
However,this year we found that the Fed is still raising interest rates.Even in July,the market was predicting that this would be the last interest rate hike,with a probability as high as 99%.But we were quickly slapped in the face.If we look at it now,the probability of the Fed raising interest rates has increased from less than 1% before to about 15%,and it is likely to increase further.
So,why does the Fed repeatedly go back on its word despite being slapped in the face?In fact,it is related to the relatively poor economic situation in the United States.
Firstly,Powell believes that the United States should control the inflation rate around 2%,but in July,it rose from 3% to 3.2%,showing an increase,so it still needs to raise interest rates once to suppress the U.S.inflation rate until it reaches the target level.
Secondly,in addition to the CPI index,the United States has something called the core inflation rate.This inflation index is more in line with the perception of life for the American people.As can be seen from the chart below,this inflation index is still at a relatively high level of 4.7%,which means that the inflation perceived by the United States is still very high.
The U.S.core inflation rate is still at a relatively high level.So,if the United States does not address the issue of high inflation and core inflation rates promptly,the U.S.economy will continue to be plagued by the crisis of inflation.The economy will experience a recession and depression in the coming years,which is known as "stagflation." This is precisely the main reason for the nearly 10-year economic downturn in the United States during the 1970s.
Therefore,from Powell's speech,we can see that he emphasized multiple times the need to continue taking measures to suppress U.S.inflation rates.He did not indicate any intention to cut interest rates but instead suggested that further rate hikes might be possible.
After this statement,the U.S.stock market began to decline,and the global economy will also be significantly affected by this single sentence,including China,of course.
What impact does Powell's call for interest rate hikes have on China?
Since 2022,China's economy has been negatively affected by the Federal Reserve's interest rate hikes.It can even be said that the Federal Reserve is at least half responsible for the rise in unemployment,layoffs,and the underperforming economic recovery in China this year.
Why do we say this?
Firstly,although China's economy is roughly the same size as that of the United States,the economic cycles are quite different.
From 2020 to early 2022,China's economy actually recovered quite well.We relied on foreign trade and effective epidemic prevention measures to become the engine of the global economy.
In 2020,China's export growth far exceeded expectations,and the trade surplus set a record.
The United States,on the other hand,relied on the Federal Reserve's continuous money printing,printing 4 trillion U.S.dollars to continue driving the development of the U.S.economy.This has led to the differences in the economies of China and the United States: severe inflation in the United States and no inflation in China.
By March 2022,the Federal Reserve began to raise interest rates,causing a significant increase in the U.S.federal funds rate and an increase in U.S.Treasury yields.The interest rate has now reached as high as 5.25%,and the market's funding rates are around 6% to 7%.This implies that the same funds kept in the United States,or even US dollars kept in Hong Kong,China,can earn an interest rate as high as around 6%,while the interest rate level for funds kept within mainland China is only 3%.This indicates that China is experiencing pressure from capital outflows,as the Federal Reserve's interest rate hikes lead to a global flow of funds towards countries with higher interest rates.
Data shows that the inversion of the interest rate differential between China and the US is deepening.
Logically,to prevent capital outflows,China should adopt a monetary policy similar to that of the US and the European Union,tightening the exchange rate and raising interest rates to counteract the outflow of funds.However,China does not have the hegemony of the US dollar and cannot print money at will,so we need to rely on low interest rates to continue supporting the development of the real economy.
So why are real estate and foreign trade not thriving this year?Because the central bank's support for the real estate sector requires a reduction in interest rates and a large-scale release of liquidity,which would lead to excessive depreciation pressure on the Chinese yuan exchange rate.If too much liquidity is released,the exchange rate could collapse.
However,not releasing liquidity is also not an option,because without it,the real estate market would collapse,so we can see the central bank making a difficult decision,repeatedly choosing between safeguarding the yuan exchange rate and preventing a systemic risk in the real estate market.
The central bank faces the dilemma of protecting the exchange rate or the real estate market.
As a result,we observe that the yuan exchange rate has been stuck around the 7.30 mark,and if it continues to depreciate,the central bank starts to stabilize the exchange rate.What about the real estate sector?There are continuous benefits of varying sizes,with a constant stream of positive news to ensure that the real estate market does not face systemic risks.
How to fundamentally solve these two issues?In fact,it's quite simple: when the Federal Reserve begins to lower interest rates,the exchange rate will start to appreciate.The central bank can then begin a large-scale release of liquidity to stimulate the real estate market and the economy.
Looking back,Powell's statement that the Federal Reserve will continue to raise interest rates actually extends the negative impact of interest rate hikes on China's economy.The depreciation pressure on the yuan will continue to increase in the future,and the speed and scale of capital outflows will also increase,which is actually detrimental to the recovery of China's economy.
The yuan exchange rate has been hovering around the 7.30 mark.In addition,the Federal Reserve's interest rate hikes also have negative impacts on the economies of other countries.For instance,they can lead to a global economic recession,the repatriation of dollars back to the United States,sluggish economic growth in developing countries,a decrease in the purchasing power of people worldwide,and reduced demand,among other things.This,in turn,results in a decrease in external demand for Chinese goods and a downturn in foreign trade.
Recent foreign trade data from Chinese customs also show that China's exports to ASEAN,the European Union,and the United States have experienced a significant slowdown in growth rates,and the export growth rate to BRICS countries has also sharply decelerated.This indicates that the slowdown in global demand is the main factor dragging down export growth rates.In July,the total customs import value was $482.92 billion,a year-on-year decrease of 13.6%.
Due to the Federal Reserve's interest rate hikes,China's foreign trade data has been disappointing in recent months.
Why is global demand slowing down?The main reason is the Federal Reserve's interest rate hikes and balance sheet reduction.Hence,this is why we criticize the Federal Reserve.You are addressing your domestic inflation,but why should the whole world pay the bill for you?
Summary
Regrettably,apart from selling U.S.Treasury bonds to express dissatisfaction with U.S.dollar assets,China has limited actions that can actually influence the Federal Reserve's decision-making.China is unparalleled in manufacturing,but it still lags far behind European and American countries in finance.
Therefore,further interest rate hikes by the Federal Reserve will undoubtedly have a significant negative impact on China's economy,including but not limited to slower-than-expected economic recovery,continued weakness in foreign trade,depreciation of the yuan exchange rate,inversion and widening of the interest rate differential between China and the United States,and capital outflows,among others.
The Federal Reserve's interest rate hikes harm not only China but the entire world.
Of course,while China faces such significant impacts,other countries around the globe are in a similar situation.Only the United States,relying on the previous printing of $4 trillion,continues to maintain relatively good domestic demand,thereby supporting its domestic economy.
However,we have analyzed multiple times that the so-called "prosperity" in the United States is actually based on the continuous issuance of Treasury bonds by the U.S.Treasury,the Federal Reserve's constant money printing,and the overdrawing of the dollar's hegemony and credibility.So,the United States is still living a good life now,thanks to the credibility of the US dollar.However,in the future,as the overdrawing of the US dollar's credibility becomes excessive and the dollar begins to collapse,the American people's lives will truly become difficult.
