The world is paying attention to the new trend of interest rates in the United States

Source: Global Times

The Federal Reserve is scheduled to announce its latest interest rate decision on November 2, which is the last interest rate adjustment meeting of the US Federal Reserve before the midterm elections on November 8. The Fed is widely expected to raise interest rates by 75 basis points, which will be the Fed's sixth rate hike this year. Although the dollar index has retreated recently, the high inflation data so far still supports analysts that the Fed will continue to raise interest rates aggressively until the end of the year. The newly released US CPI in September increased by 8.2% year-on-year, exceeding market expectations, and the public pressure brought about by rising domestic prices has caused headaches for the US government. While the global market is waiting for the Fed's decision to "hit the boots", it is also reflecting on the impact of the dollar's "safe haven" on the economy since the beginning of this year.

Exports by U.S. companies have been greatly affected

The results report just released by the US-based multinational Abbott showed that the performance of its international medical device business was lower than expected due to the sharp appreciation of the US dollar and other reasons. After the report was released, the company's stock price plunged nearly 7%.

Abbott's experience is not an isolated case among American companies. U.S. companies such as Microsoft, Market Opener and software company Salesforce have collectively lowered their performance forecasts amid a strong rise in the dollar. Among them, Microsoft posted its slowest growth in five years, and currency fluctuations reduced its revenue by $2.3 billion. Procter & Gamble experienced its first annual sales decline in 5 years and blamed the strong dollar for taking a severe hit to its sales. Netflix and Johnson & Johnson also said currency headwinds were eroding their profits.

Qatar's Al Jazeera reported that the dollar index had risen 40 percent from its lowest level in 2011 as of October. "The soaring dollar is making U.S. multinationals frown." Deutsche Welle reported on October 30 that about 30% of the revenue of American companies comes from abroad, so while the rise in the dollar makes American tourists happy to enjoy affordable holidays in the UK and Japan, US exporters and companies with international business are experiencing losses, and the appreciation of the dollar makes their products and services too expensive and uncompetitive in the market. Taylor, senior director and head of U.S. corporate research at Fitch Ratings, said that "more and more companies are warning in their earnings reports of the risk of a strong dollar, and many companies have revised their profit guidelines due to exchange rate fluctuations."

The United States grew at a sequential rate of 2.6% in the third quarter, avoiding the embarrassment of the economy falling into a technical recession. However, the Wall Street Journal said that economic data may mask the slowdown amid higher interest rates, rising inflation and falling stocks and home prices. U.S. Treasury Secretary Janet Yellen admitted in an interview that inflation was "unacceptably high." "Americans feel it every day," she said, adding that it could be years before we see prices fall back to "levels that people are more used to."

He Weiwen, a senior researcher at the Chongyang Institute for Financial Research at Chinese Minmin University, said in an interview with the Global Times that the US CPI slipped in September, but the core CPI climbed to 6.6% again, a 40-year high. This shows that it seems very difficult for the United States to stabilize inflation, and the American people may still be under the pressure of high prices in the future.

"Great inflation" stems from "big release of water"

Since March 2022, when the Fed began its most intensive and aggressive rate hike process since 1981, the Fed has raised interest rates five times during the year, accumulating 300 basis points, before the latest Fed meeting on November 2. In June, July and September, the Fed raised interest rates by 75 basis points three times in a row for the first time in its 40-year history, raising the US federal benchmark interest rate to 3.00%-3.25%.

Currently, the Fed is widely expected to raise interest rates by 75 basis points for the fourth time in November, raising the target range of the federal benchmark rate to 3.75%-4.00%. What drives the Fed to cause violent shocks in global financial markets is the high inflation level in the United States.

US inflation has soared from 6.2% in October 2021 to a 40-year high in 1982, according to the US Department of Labor. After breaking 7 in December 2021, the US inflation level continued to soar, breaking through 7.5% in January and reaching a rare high of 8.5% in March, after which the Fed began the process of raising interest rates frantically.

However, inflation in the United States has not eased much with the Fed's interest rate hike, and after raising interest rates again in May, US inflation reached a record high of 9.1% so far this year in June, and then began to slowly decline, but remained above 8%.

The latest data from the US Department of Labor showed that inflation in the US was 8.2% in September, down from previous highs but still higher than market expectations. Notably, core inflation, excluding energy and food, reached 6.6 percent, the biggest increase since August 1982 and the highest inflation most Americans have seen today.

The market generally believes that the reason for the high inflation in the United States is mainly the US supply chain problems accompanying the new crown pneumonia epidemic, and the other is the "currency release" in the United States.

Li Wei, director of the Center for Economic Diplomacy Research at Chinese Minmin University, believes that the spillover effect of the Russia-Ukraine conflict is the direct cause of high inflation in the United States this year, and high global energy prices and food prices have ultimately affected the United States. The fundamental reason is the "big release" of US fiscal and monetary money. After 2020, the two US administrations have introduced four large-scale spending bills in just two years, with a total scale of $6.3 trillion. Under the massive stimulus policy in the United States, the inflation level rose in response and accelerated all the way.

"Printing money doesn't solve the problem"

"The Fed is setting standards for other Western central banks," Germany's Neuedeutsche Zeitung reported on November 1, adding that while the Fed is raising interest rates, other Western central banks are facing similar challenges in the foreseeable future. The Bank of England, the European Central Bank, the Swiss National Bank, etc. will also make a decision. So far, only the Bank of Japan has insisted on low interest rates.

German economic expert Joachim Scheider warned that there are growing fears of a "steady recession": central banks' decision to raise interest rates could push the economy into a deeper recession.

In the euro area, the ECB is helpless in the face of "imported inflation" triggered by rising energy and commodity prices since 2021. A stronger dollar is triggering a dramatic change in global foreign exchange and financial markets not seen since the 2008 global financial crisis. Investors prefer to see the dollar as a "safe haven" in difficult times, but the Fed's aggressive interest rate policy has put enormous pressure on other central banks.

"The Fed is not a model", the German editorial network previously analyzed that the Fed is raising interest rates sharply, and the European Central Bank is becoming more and more resolute. However, economists are now wondering whether raising rates could lead to a deep recession. Business Insider Germany reported on November 1 that rising interest rates will reduce the flow of money into the stock market, dragging down stock prices. As interest rates are higher, more money will flow into the euro area, and increased demand for the euro will increase in its price. At the same time, raising interest rates will also depress the economy. Higher interest rates make borrowing more expensive to invest.

The Austrian "Standard" reported on October 30 that following the Federal Reserve, the European Central Bank is also stepping up its fight against inflation, and this week it is expected to raise the key interest rate sharply again. As a result, the global economy has entered a period of turmoil. Central banks are expected to follow the US in raising interest rates, which will make the consequences even worse. This will trigger a serious recession.

Harvard economist Kenneth Rogoff was quoted as warning that "the idea that the state prints money and everything will be fine is over." He believes that countries should carry out structural reforms, but at present there is no political interest in this in Western countries.