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Southern Finance and Economics all-media reporter Shi Shi reported from Shanghai
For the third time in a row, the Fed held its ground
The U.S. Federal Reserve ended its two-day monetary policy meeting on the 13th and announced that it would keep the target range for the federal funds rate unchanged between 5.25% and 5.5%. This is the third time in a row that the Fed has left this interest rate range unchanged since September this year. Fed Chair Jerome Powell said at a press conference after the meeting that the current federal funds rate "may be close to the peak of the current tightening cycle."
What signals do the minutes and Powell's speech reveal? Today, we are pleased to have Hu Jie, a professor at the Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University and former senior economist at the Federal Reserve, and Wang Dan, chief economist at Hang Seng Bank (China), to discuss this topic with us.
Optimism about inflation risks remains cautious
Global Finance Wire: Judging from the minutes, does the Fed believe that inflation risks have decreased significantly?
Hu Jie: Judging from the information revealed by the whole meeting, it is true that this meeting is relatively optimistic about the risk of inflation, but it should be said that the target has not yet been achieved, and the risk is declining, but it is still far from the ideal level of 2%, so I think there is still a bit of caution in optimism. So then we have to look at how the overall inflation situation changes in the first half of next year.
The possibility that the Fed will continue to raise interest rates next year is not ruled out
Global Finance Connection: Is the Fed's "last mile" to fight inflation still arduous, and how will it affect its policy path?
Wang Dan: The Fed is now fighting inflation, some people say it's the last mile, some people say it's the last three kilometers, and some people say it's the last five kilometers. It all depends on how you expect its monetary policy to go in the future.
Fed Chairman Jerome Powell actually mentioned that they are now considering a rate cut, which is a very strong signal to the market. However, in the United States, from the perspective of inflation in all aspects, wage inflation has been high. Inflation is indeed very close to the Fed's 2% target from the current point of view, but the next step is to be American Xi, he will not save most of his money, and will spend it after wages rise. So if the Fed continues to raise interest rates in May or June next year due to a new round of inflation caused by rising wages, I don't think this possibility can be ruled out.
The market should not over-interpret the signals of interest rate cuts
Global Finance Wire: The market is more concerned about when to cut interest rates than at the end of interest rate hikes, which has become a fact. Compared with the previous statement, what is the Fed's attitude this time?
Hu Jie: This time, it should be said that everyone can feel that the Fed is relatively optimistic compared to its previous "particularly cautious" statement. In particular, the mention of the unemployment rate, inflation indicators, and some economic indicators other than inflation indicators also seem to give the Fed some confidence.
In other words, the first interest rate hike must be over, so it seems that the Fed has expressed greater confidence in the control of inflation in such a rate hike situation, and even mentioned that it will gradually put when to cut interest rates on the agenda to be discussed. However, I think that the market may not over-interpret such a signal, after all, the inflation target has not been reached, and there is still a lot of distance between discussing the possibility of interest rate cuts and the actual time point of facing interest rate cuts.
Interest rate cuts will start as early as next year or at the end of the year
Global Finance Wire: According to the Fed's statement, what do you think will be the timing and magnitude of interest rate cuts next year?
Wang Dan: If there is a real interest rate cut, I think it will be at the end of next year. In the first half of the year, there are a lot of big events to happen in the United States, including sports events, and many infrastructure projects to be rolled out, which is actually very similar to China's situation more than a decade ago. China's infrastructure cycle has passed, but the United States is just getting started. Especially next year, which is also the year of the election in the United States, there are actually a lot of new projects to start.
We have seen that the domestic economy has been more resilient than expected, so if inflation is really under control, then a rate cut at the end of the year is a good signal for the market, and if an early rate cut creates a new round of inflation, it will not be good for the year-end election at all. Because now from the perspective of the Democratic Party, he must keep inflation firmly below a certain level for most of the next year. So we now think that there is a high probability that there will be no rate cut, and if there is a rate cut, it will be at the end of the year.
The Federal Reserve raised its economic growth forecast for this year
On the same day, the Federal Reserve also released its latest economic outlook forecast, raising its US economic growth forecast for this year by 0.5 percentage points to 2.6% from its September forecast, and lowering its economic growth forecast for 2024 by 0.1 percentage points to 1.4%.
A slowdown in U.S. economic growth next year is a high probability event
Global Finance Link: How much pressure will there be on the U.S. economy to slow down next year, and what are the prospects for a soft landing for the economy?
Hu Jie: The U.S. economy will definitely slow down next year, because now the high interest rate is already a very restrictive environment, now the company's working capital loan interest rate is 9%, 30-year fixed mortgage interest rate is 8.1%, under this environment, the economy can not slow down, the early stage is because of the result of fiscal policy release, so that the people still have more abundant cash, but when people turn to borrow to maintain production operations and consumption, this restrictive environment will produce a very clear consumption effect.
Therefore, the slowdown in US economic growth next year is a high-probability event, but will the slowdown reach the extent of a hard landing? Now it seems that this probability is also relatively small, and the so-called hard landing means that the growth rate will drop sharply or even reach a negative range.
The U.S. economy is likely to outperform expectations
Global Finance Connection: Mr. Wang, what do you think, and is the risk of a recession in the United States basically avoidable?
Dan Wang: There have been one or two technical recessions in the U.S. economy, because the definition of a recession is two consecutive quarters of downward GDP growth. But looking at the domestic labor market, the economy has always been overheated. If the US economy is redefined, it will at best turn from overheating to strong, and in fact there is no sign of a real recession.
Judging from the next step of government policy stimulus, monetary policy may remain relatively tight, but fiscal policy will remain accommodative, so the resilience of the U.S. economy may continue for a long time. This can also be seen in the attitude of investors around the world. Although the Fed has said that interest rate hikes are over, we are seeing a trend of capital flows back to the United States, especially to the US manufacturing sector, from around the world. This sets the tone not only for investment in the U.S. manufacturing sector, but also for real estate investment.
So I'm afraid there will be a long time next year when the U.S. economy may outperform expectations without a recession.
The three major U.S. stock indexes rose sharply
After the interest rate decision was announced, the three major U.S. stock indexes rose sharply overnight, closing above 1.3%. Previously, the market had already begun to trade in advance the expectation of "a total of 5 rate cuts starting in March next year".
Next, U.S. stocks are likely to be positive
Global Finance Wire: U.S. stocks rose sharply overnight, indicating how the market understands the Fed's signals?
Hu Jie: For this meeting, the US stock market obviously gave a very positive reaction. From a historical perspective, every time the Fed's monetary policy begins to move towards easing, it is the beginning of a bull market for U.S. stocks. Whether it is the situation after the 2008 financial crisis or the Fed's water release that began in March 2020, it should confirm such an assertion. In other words, the easing of capital is actually a very clear signal that the US stock market is heading for a bull market.
At present, the interest rate hike in the United States should be over, and the whole easing or tightening state will remain stable. By the middle of next year or a little later, it should enter a state of interest rate cuts, which means that the current capital is a turning point from a smooth and gradual transition to easing. At this time, the stock market has taken the lead, and it has seen the easing of funds, so the mentality of going to a bull market has become more common. So next, I think the U.S. stock market is likely to usher in a positive future.
The U.S. stock market will continue to be driven by the high-tech sector
Global Finance Link: What is the outlook for U.S. stocks next year, and what factors will affect them?
Wang Dan: Today is equivalent to the United States sending warmth to the world, and the stock markets of various countries have actually responded well.
Next year, the big driving force for the U.S. stock market will still come from the high-tech industry, which will be in line with this year's trend. We see that the real ambition of global investors is in AI and other technological advancements that can change the future in the long run. And these big tech companies are now not only gathering a lot of capital, but also the best talent in the world, and this situation is going to deepen and concentrate further.
Therefore, we believe that the performance of the U.S. stock market next year may be similar to this year in many areas, both good and bad, but it is generally tepid, and the best performers will still be concentrated in a limited number of dozens of companies and enterprises.
The federal funds rate remains at a 22-year high
Looking back at the current round of interest rate hike cycle launched by the Federal Reserve since March 2022, the cumulative rate hike has reached 525 basis points, and the interest rate level has remained at the highest point in 22 years, and the entire rate hike process can be described as very aggressive.
The Fed's rate hikes have largely met expectations
Global Finance Link: How do you evaluate the Fed's use of monetary policy tools in this interest rate hike cycle?
Hu Jie: There are two aspects to this. First of all, due to the Fed's negligence, or due to the surprise of the Russia-Ukraine conflict, it brought about a surprise. The Fed should not allow CPI to grow by more than 9% year-on-year, so it is worthy of criticism in this regard.
However, after the outbreak of the Russia-Ukraine conflict, the damage to the energy supply chain and the inflation caused by the damage have become unstoppable. Since then, the Fed's actions have been fairly decent, and the decisiveness of its decisions has been remarkable.
Considering the past year or two, judging from the effect of the Fed's interest rate hikes, it should be said that it has achieved its expected goals. I think the operation itself is still very professional, and it is also very in place and effective. But in terms of predicting the situation, I think it can be said that I have lost a lot of points. In fact, none of the previous Fed chairmen made such a big mistake, and Powell can be said to have walked on the edge of the cliff and returned, otherwise he might have left a bad name in history.
Balancing the fight against inflation and stabilizing the economy is expected to achieve desirable results
Global Finance Link: Is the current balance between fighting inflation and stabilizing the economy already a relatively ideal result?
Hu Jie: Now it seems that there is hope to achieve an ideal result, and the so-called hope means that we cannot be full of words now, after all, the core CPI is still around 4%, and there is still a distance from 2%. So we say very promising, but let's not jump to conclusions just yet.
In addition, while controlling inflation, the economy has not been intervened too negatively for various reasons, so from this point of view, it is good to say that it is lucky, and it is good to say that it is doing well, in short, it is still a positive plus factor.
Developing countries should vigorously develop their domestic economies
Global Finance Link: Before the interest rate cut, what impact will the high interest rate maintained by the United States have on the global economy, and will it continue to have a certain impact on developing countries?
Wang Dan: The last time the United States raised interest rates so aggressively was in the late 80s. We can also recall very clearly the debt crisis of emerging market countries at that time, and the sovereign rating crisis, and then the currency crisis, which were actually due to the interest rate hike in the United States at that time.
For the United States itself, it is primarily responsible for the economy at home, it is not responsible for the rest of the world. So at this point in time, the risk-free rate of return in the United States is actually 5%, which is closely related to the Fed's interest rate hike. But if you put that money into emerging market countries, the returns are close to zero.
So in layman's terms, the United States is indeed taking advantage of its sovereignty and the dominant position of the currency in global circulation. We have seen that the world is not becoming more and more peaceful and globalized, but that there are many anti-globalization trends taking place, and protectionism in various regions is also strengthening unprecedentedly. The Fed's interest rate hike policy will have a big impact on emerging market countries. So if the Fed can really stop raising interest rates or even cut them in 2024, the world will breathe a sigh of relief.
For developing countries or third world countries, of course, on the one hand, they expect the monetary policy of the United States to normalize, but the most important thing is to do a good job of "focusing on me". Because from China's point of view, for example, our main policy is focused on industrial transformation and upgrading, which is actually improving the security of the economy, and all emerging market countries must do their best to improve the security of their own economies, that is, they cannot overexpose their economies to the influence of the United States.
As for other emerging market countries, such as Argentina and Brazil, on the one hand, they have to reconsider their monetary policy and their exchange rate policy; on the other hand, they really want to Xi learn from China, transform to high-tech industries, and strengthen their industrial chain capabilities. Therefore, for developing countries, it may be the right way to base themselves on their own realities and vigorously develop their domestic economies.
(The market is risky, and investors need to be cautious.) The opinions of the guests on this program only represent their own views. ）
Curator: Yu Xiaona
Producer: Shi Shi
Editor in charge: He Jia
Reporter: Li Yinong
Production: Li Qun
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