"Chief Wired" Guan Tao: How to fight inflation and promote growth

Chief Guest: Guan Tao (Director of China Chief Economist Forum, Global Chief Economist of BOCI Securities)

Chief Reporter: Zhang Jing (CCEF Research Institute, Macro Researcher)

Chief Wired: Hello, Teacher Guan. President Biden nominated Powell for re-election as Fed chief, with Brainard as vice chairman. The same is dovish, but Powell raised rates four times when he took office in 2018, and Brainard has said there should be no rush to raise rates until full employment is achieved. Coupled with the fact that the Omicron virus swept across the market this week, how do you see the currency trend in the United States in 2022? How will inflation be combated and growth boosted?

Guan Tao: Okay, thank you for your question. Recently, Biden nominated Powell for re-election as Chairman of the Federal Reserve, which should be said to be a full affirmation of the positive role played by the Fed in the response to the epidemic. Powell's re-election will help maintain the continuity of monetary policy and also help strengthen communication between the Fed and the market. Whether the Fed's monetary policy is introduced or withdrawn, it has a great impact on the market, especially on the financial markets. Therefore, having a leader who is more familiar with the market is conducive to maintaining smooth communication with the market. If you change people, you may increase some friction costs with the market. And, personally, I don't think Powell is necessarily a dove. In fact, powell has a long period of time after taking office, the first half is mainly to raise interest rates, especially in 2018 there were four rate hikes, after 2019 to cut interest rates. Therefore, Powell still better maintained the independence of the Fed's monetary policy. Brainard's election of vice chairman has not changed much from the direction of the Fed's monetary policy. Both Powell and Brainard are already current fed governors, and their views have been echoed and voted on at Fed meetings. Therefore, after Brainard takes office, unless he changes his views to become more dovish or turns hawkish, there will be no big impact on the Fed's monetary policy.

I think what actually affects the Fed's monetary policy is not whether Powell and Brainard are dovish or hawkish, but a lot depends on the trend of inflation in the United States. Now, the U.S. faces the risk of across-the-board inflation, and persistently high inflation has the potential to de-anchor inflation expectations. The current situation should be a big challenge for developed countries and central banks. In its latest World Economic Outlook, the International Monetary Fund (IMF) has analyzed the central bank's monetary policy operations in the context of inflation. One of the prospects is that after inflation is expected, the central bank cannot wait for the employment target to be fully achieved before tightening. Because if the monetary policy response is delayed, it may affect the credibility of monetary policy, but it will bring new uncertainty to the market. Uncertainty affects private investment, as well as employment, contrary to the original intention of the central bank's monetary policy. Therefore, it is suggested that if inflation is expected, central banks, including the Federal Reserve, should react quickly. Next, whether the Fed is dovish or hawkish depends critically on the Fed's current judgment on U.S. inflation. For now, at least, the Fed's temporary position on inflation has loosened.

In recent times, we have seen new mutations in the new coronavirus. The Omicron virus swept the market, causing unrest. On November 29, Powell made a public comment on this: he pointed out that the recent increase in confirmed covid-19 cases and the emergence of the Omiljun strain pose downside risks to employment and economic activity in the United States, increasing inflation uncertainty. Contrary to market speculation that the Fed may delay monetary policy tightening, Powell instead believes that if the virus causes people to reduce their willingness to work out of fear, it may slow the improvement of the labor market and exacerbate the crisis in the supply chain. His preliminary judgment may be that the virus mutation may further delay inflation. In fact, this is also what I mentioned in a recent column, if the epidemic cannot be effectively contained, the longer it drags on, the longer the supply chain crisis lasts. Over the past decade, the Fed's monetary boom has led to a flood of liquidity, which could create a lot of inflationary backlash. So, I think the Fed is closely watching the possible impact of the new virus variant on inflation. For now, it may not necessarily slow the pace of the Fed's monetary policy tightening. The Fed may still grasp the rhythm and strength of the exit of monetary policy based on a dynamic assessment of inflation and inflation expectations.

Chief Link: The third quarter currency implementation report released by China's central bank emphasizes that "with me as the mainstay, monetary policy will be more structural" However, the expressions of "resolutely do not engage in flood irrigation" and "manage the total valve of the currency" have been removed. How do you interpret this? How will China's monetary policy be interpreted in 2022?

Guan Tao: The central bank has just released the third quarter currency implementation report, and I see that the market also has a lot of interpretation. Including what you just mentioned, the expressions of "resolutely do not engage in flood irrigation" and "manage the total valve of the currency" have been deleted, and there is a lot of speculation in the market. But I don't think that mentioning not doing flood irrigation doesn't mean that the central bank should do big water release next. In the third quarter of the monetary implementation report, the central bank still emphasizes the need to do a good job of cross-cycle adjustment and coordinate the convergence of monetary policy this year and next year. Monetary policy is still to adhere to the word steady, mainly me, and there is no major change from the previous period. Moreover, we must not only listen to him, but also watch his deeds. We saw that in November, the market's concerned "spicy powder" (MLF) and "sour chili powder" (SLF) profits did not adjust for 19 consecutive months, and monetary policy continued to be in a state of inactivity. Of course, the main thing is that the big moves of RRR cuts and interest rate cuts have not been made, but the central bank has increased its use of structural monetary policy tools. We have seen that the recent 300 billion yuan of small refinancing and 200 billion yuan of refinancing lines have supported coordinated regional development, 200 billion yuan of special refinancing to support the clean and efficient use of coal, as well as the extension of the past two monetary policy tools that have directly reached the real economy, and the latest carbon emission reduction support tools. And according to the latest data, the central bank's balance sheet was expanded in September and October, two consecutive months, and the absolute scale has expanded, reflecting the effect of the use of some structural tools. It seems that the central bank will not move, but in fact, it will continue to increase financial support in some weak links for economic development and strategies that are in line with the future development direction.

In this case, I think everyone is very concerned about the Fed's monetary policy tightening and China's monetary policy in order to stabilize growth, monetary policy should continue to remain stable and more relaxed, and what kind of impact the re-differentiation of Sino-US monetary policy will have on China. Personally, I believe that this should not have a big impact on China's monetary policy independence next year. Why? Because over the years, China's private foreign currency mismatch has improved significantly. Moreover, the exchange rate elasticity of the renminbi is also significantly increased, whether the renminbi rises or falls, the market can operate normally, and there will be no panic of appreciation or depreciation. The key is that China has a relatively big advantage over the United States, that is, China's epidemic control is relatively good, and the economic recovery is relatively fast. In such a situation, the main manifestation of our contradiction between supply and demand is that the supply exceeds demand, the domestic supply is sufficient, and the price is basically stable, so the inflation pressure is relatively light. In the United States, not only does the PPI be high, but the CPI is also very high. Therefore, China's monetary policy, relative to the Fed, can be in a more favorable position. Therefore, we feel that next year, the People's Bank of China can adhere to the independence of monetary policy, and while maintaining the stability of monetary policy, it will be stable and take the lead, with me as the mainstay, and do a good job of cross-cycle adjustment. Then cross-cycle, that is, on the one hand, the economic recovery is not completed, and monetary policy must continue to provide necessary support for economic recovery. But on the other hand, cross-cyclical is not counter-cyclical, nor does it mean that further monetary stimulus measures are about to be taken, and may be more reflected in the use of some structural monetary policy tools. Our monetary policy is in a normal state, which also provides greater autonomy for China to deal with the uncertainty brought about by the continued spread of the epidemic to economic operations. If there is a real need, I don't think the adjustment of the policy interest rate, and the adjustment of the reserve requirement ratio, is an exclusion. I think that at the regular meetings of the central bank's monetary policy in the second and third quarters, the continuous emphasis on strengthening the monitoring of marginal changes in the economic and financial situation at home and abroad, doing a good job of cross-cycle adjustment, and enhancing the autonomy of monetary policy reflects the thinking in this regard.