• News
• 2024-05-04

Fed's Rate Hikes to Continue Amid Persistent Inflation Crisis

Just this morning, the Federal Reserve once again personally detonated a "black swan" event.

In today's released Federal Reserve meeting minutes, the high-ranking officials of the Federal Reserve believe that 2024 is suitable for interest rate cuts, but the path of rate cuts is uncertain, and the Federal Reserve may still raise interest rates.

This statement directly detonated the market, causing gold and U.S. stocks to plummet, U.S. Treasury yields to rise to 4%, and global financial markets to experience short-term turmoil. The weakening of the U.S. also directly affected the Asian financial markets, and the A-share market was also impacted and challenged in the morning.

Is the Federal Reserve detonating a black swan? Will interest rates continue to rise this year?

This is what the Federal Reserve meeting minutes say this time.

Firstly, Federal Reserve officials believe that the current inflation in the United States has improved, which means that it is appropriate to cut interest rates in the United States this year. After all, the current high interest rate of around 5.5% is already causing the U.S. economy to be in a state of recession, so if interest rates are not cut, then the "soft landing" of the U.S. economy is actually in danger.

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Powell stated that he would observe inflation data more cautiously.

However, what is more terrifying than a U.S. economic recession is the counterattack of the inflation crisis; they believe that the current inflation forecast still has a high degree of uncertainty, and even the Federal Reserve cannot control the future trend of inflation development.

As a result, the chairman of the Richmond Federal Reserve indicated that although the demand in the United States is good, it cannot solve the problem of inflation being higher than the target, so the Federal Reserve may still raise interest rates this year.

The attitudes of other officials are similar. Unless inflation in the United States further declines, the Federal Reserve will not rule out the possibility of further raising interest rates. "Under certain economic conditions, further raising interest rates may be appropriate."Richmond Federal Reserve Chairman

This statement has frightened the market, leading to turmoil in the U.S. financial market in the early morning today. First, there was a significant decline in the major U.S. indices, with the Nasdaq plunging by 1.18%, and the S&P 500 falling by 0.8%; meanwhile, domestic A-shares also experienced a morning sell-off, with the Shenzhen Composite Index dropping by 1.44%, and the Shanghai Composite Index falling by approximately 0.87%.

Both U.S. stocks and A-shares have seen substantial declines.

The yield on the 10-year U.S. Treasury bonds also weakened at one point, rising to a yield of around 4%. This is the significant impact caused by the hawkish remarks from the Federal Reserve on the market.

Moreover, in my view, the caution of Federal Reserve officials is very necessary. This is because the inflation issue is inherently a thorny problem for the global economy.

Assuming that the Federal Reserve prematurely loosens and lowers interest rates now, inflation is likely to rebound due to an overly loose financial environment, failing to achieve the target of below 2%.

At this time, if a black swan event similar to the Red Sea crisis occurs, or some geopolitical crisis emerges, inflation will rise quickly, thereby launching a counterattack on the United States.

At this point, the U.S. economy would fall into a "stagflation" crisis, characterized by both recession and inflation, causing significant and lasting negative impacts on the U.S. economy.

The U.S. economy faces a recession and an inflation crisis.

It is important to note that both inflation crises and economic recessions can be reasonably addressed through either loose interest rate cuts or tight interest rate hikes. However, in the face of a stagflation crisis, the Federal Reserve is essentially caught between a rock and a hard place, with no particularly good solutions; even if it replicates the previous Volcker moment, it would require a huge price to be paid.To be frank, the Federal Reserve also yearns for interest rate cuts and monetary easing, as by doing so, by printing money and issuing US dollars, the economic issues of the United States could be swiftly resolved. However, if inflation is not firmly controlled, it's likely that Powell would not sleep soundly. This is also the fundamental reason why a host of Federal Reserve officials refuse to stop raising interest rates.

In 2024, should interest rates be raised to combat inflation, or lowered to stimulate the economy?

The United States finds itself in a dilemma because the Federal Reserve is attempting to seek balance between the two contradictory goals of inflation and the economy, in order to perfectly resolve both issues.

Let's first discuss inflation. The inflation data for November 2023 shows that the US CPI index stands at 3.13%. Although significantly lower than the peak inflation rate of 9.1%, it still has not reached the Federal Reserve's expected target of below 2% inflation; moreover, the US CPI also includes a core CPI, an index that is given more weight by the Federal Reserve.

The US inflation rate in November remains high at 3.1%

What about the core CPI for November? It rose by 4.0% year-on-year, showing no decrease compared to the previous months. So even though Federal Reserve officials believe that they have successfully controlled inflation in 2023, the issue is that neither 3.1% nor 4.0% has reached the 2% target mentioned by Federal Reserve Chairman Powell.

It should be noted that the probability of a rate cut in February has already approached 15%, and the likelihood of a rate cut by the Federal Reserve in March is even higher. With two months to go, can the US inflation rate fall below 2%? I think it's still a bit challenging.

Of course, as we mentioned earlier, the reason Powell is considering a rate cut is actually due to pressure from the US government. Biden is exerting pressure on him, attempting to have the Federal Reserve prioritize addressing the issue of economic recession, thereby helping Biden secure more votes. As for inflation, it can be dealt with after Biden has settled into the presidency.

Biden's hope for Powell to cut rates to boost the US economy is also justified. This is because a series of domestic and international investment institutions have clearly stated that the US economy will slow down this year, with the GDP growth rate expected to be adjusted to around 1.4%.Additionally, the Federal Reserve's data fabrication, or "revisions," is an old tradition. Therefore, we need to approach the data published by the Federal Reserve with caution and be more pessimistic in our actual assessments to offset the United States' habit of embellishing data.

More importantly, the U.S. economy is primarily supported by consumption. The current high interest rates have led to increased borrowing costs in the United States. The credit card debt of Americans has already exceeded one trillion dollars, and the delinquency rate has reached the highest level in ten years, indicating that the financial situation of American consumers is deteriorating and very serious.

This means that Americans may not have the money to continue consuming and stimulating the U.S. economy through consumption in the future.

Summary

The market originally expected the Federal Reserve to obediently ease and lower interest rates, so both the U.S. stock market and bond market performed well, and gold continued to rise.

However, it was unexpected that the Federal Reserve did not intend to play by the rules. Powell was rare in showing firmness again, expressing concerns about inflation in the meeting minutes released in the early morning.

The shift in Federal Reserve policy has led to financial market turmoil.

While several high-ranking Federal Reserve officials acknowledged the effectiveness of controlling inflation, they still expressed a possible attitude of raising interest rates. The Federal Reserve's sudden hawkish stance has also become the first black swan in the financial market in 2024.

Of course, the root cause of this black swan is still the U.S. government's "wanting both." They hope that the U.S. economy does not fall into recession and ideally achieves a soft landing; at the same time, they hope to control inflation to avoid falling into a "stagflation" crisis.

This leads the Federal Reserve to constantly oscillate between raising and lowering interest rates, easing and tightening, continuously shrinking the balance sheet, and pausing QT. In this regard, the position of the Federal Reserve Chairman is indeed not an easy job. The financial market in 2024 may be more crazy and turbulent than in 2023!