Last year, the Federal Reserve decided to keep the federal funds rate unchanged and released a dot plot suggesting that it would start a cycle of interest rate cuts this year, and the U.S. stock market immediately ushered in a strong rally.
In response to the Fed's "dovish" statement, many experts expressed concern about this, believing that the Fed pushed for interest rate cuts too early, and allowing the dollar to depreciate will inevitably lead to high inflation in the United States, and a rapid policy shift may plunge the United States into a stagflation crisis.
From cautiously adjusting the interest rate hike strategy to hinting at the start of the interest rate cut cycle, is the Fed's decision-making attitude "from hawk to dove" related to the US presidential election year? What impact will the US interest rate cut cycle have on the mainland and the global economy?
1. The Fed's attitude is "dovish"
After the release of the last interest rate meeting statement in 2023, a number of Fed officials hinted that the nearly two-year cycle of strong interest rate hikes is coming to an end, and that it may be replaced by a slow cycle of rate cuts.
Some analysts predict that by the end of 2024, the US federal funds rate may fall to the range of 4.5%~4.75%, but this must be based on a stable and controllable inflation rate and unemployment rate.
Although the Fed did not explicitly say in the statement that it will push for interest rate cuts in 2024, the report clearly expressed concern about the performance of the US economy in the fourth quarter.
It is believed that the slowdown in the momentum of U.S. economic growth may be one of the important reasons for the Fed's decision to tentatively cut interest rates.
Before advancing the cycle of strong interest rate hikes, the Fed revealed to the outside world that there are two fundamental goals of this round of interest rate hikes: one is to restore the domestic inflation rate to 2%, and the other is to ensure that the US economy does not have a recession or a hard landing.
Data shows that the CPI in the United States rose by about 4% year-on-year in November last year, and the price increase is far from showing a downward trend.
When entering the interest rate cut cycle, the overall inflation level in the United States will inevitably rise, which is obviously contrary to the Fed's goal to achieve, and the advantage of choosing a policy shift at this time is that you can use the interest rate cut cycle in exchange for a temporary boom in the US economy.
In its final statement last year, the Fed also made a point of emphasizing the need to fully consider any additional policies that could affect the domestic inflation rate, such as adjusting the size of its holdings of Treasury bonds or agency mortgage-backed securities.
At a critical moment when the impact of strong cyclical interest rate hikes on the U.S. economy is gradually decreasing, adjusting more financial and monetary policies is crucial to maintaining the stable operation of the economy.
The Fed's willingness to use "any" monetary policy to offset the impact of an early rate cut suggests that the policy pivot may not be motivated by economic considerations.
Second, the potential risks are intensifying
On the day of the Federal Reserve's interest rate meeting, the U.S. stock market quickly responded to its "dovish" statement, with the Nasdaq Composite Index rising 1.4%, and the Dow Jones Index breaking through 37,000 points, hitting a record high.
At the same time, the news of the expected interest rate cut in the United States has also injected a shot of strength into the international investment market. In contrast, the yield on the 10-year Treasury note fell by about 0.17%.
It is true that a rate cut will increase the amount of dollars circulating in the international market, but it seems that the money is more in favor of emerging market countries than staying in the United States, as evidenced by the strong performance of emerging market equities.
Monetary easing can only solve the problem of money supply, but it cannot fundamentally solve the trend of economic recession.
If the Fed really firmly pursues a strategy of cutting interest rates in the future, then it will have to face a gradual decline in US Treasury yields, which will hit the international share of the US dollar and may even trigger a sell-off.
In the face of the current economic difficulties, the U.S. government continues to expand its budget and whitewash prosperity, especially the U.S. military spending has risen from more than $770 billion in 2020 to nearly $900 billion last year.
Fiscal spending has increased instead of decreasing, monetary policy has shifted to quantitative easing, and the result of the US money printing press working at full speed will inevitably be uncontrollable high inflation, and then it will fall into economic difficulties.
In fact, the Fed is well aware that an early shift in monetary policy will have a negative impact on the already "sensitive" U.S. economy, and even if it wants to promote the implementation of interest rate cuts this year, the range of interest rate cuts it chooses will be significantly converged, and there will definitely be no big ups and downs.
The Fed's rate-cutting strategy has had a very limited effect on stimulating the U.S. economy, and it is a palliative approach that could lead the U.S. economy into a stagflation trap if it is not careful.
Third, the political game behind the interest rate cut
At present, in addition to the weaker than expected performance of the U.S. economy in the fourth quarter of last year, political factors are also one of the factors that the Fed is inclined to cut interest rates.
2024 is the presidential election year in the United States, and in the face of the coercion of both the Democratic and Republican parties, it is difficult for the Federal Reserve, which claims to be an independent institution, to avoid political interference in important decisions, or it is difficult to escape from the control of power.
For the current ruling Democratic administration, the strategy of cutting interest rates to achieve the goal of boosting the economy in the short term, effectively creating social investment and improving unemployment, will naturally help this year's election.
After the federal funds rate broke through 5%, it is clear that the ruling party does not want to see the US debt on the verge of a thunderstorm.
In the warm-up stage of the election, Republicans have repeatedly proposed a systematic reform of the Fed's operating mechanism, which is bound to touch the core interests of Fed insiders, and the current Fed Chairman Powell was recommended by Trump when he was in office.
But the Fed must now learn how to respond to the Biden administration's political pressure, such as cutting interest rates on a manageable scale. The Federal Reserve has a significant impact on the national lifeblood of the United States, and it has always been the focus of a tug-of-war between Republicans and Democrats.
The so-called independent operation of the Federal Reserve is only based on the macroeconomic performance of the current economic situation, in fact, no government agency can be completely detached from the influence of the political center, and the "fire" of the US presidential election has already been ignited.
As the presidential election approaches, the Republican Party will strategically choose to compress the fiscal pressure on the Democratic Party, and the Democratic Party will take the lead in choosing to cut interest rates to hedge the fiscal "forced palace" in advance.
It is reported that the Fed's first interest rate cut this year may occur in the second quarter, and the rate cut may be 25 basis points, and this range will continue to the third and fourth quarters until the cumulative completion of 75 basis points of adjustment throughout the year.
On the premise of anchoring the 2% inflation recovery target and avoiding a hard landing, political factors have ultimately become the catalyst for the Fed to choose to end the rate hike cycle early and start the rate cut cycle, although the new cycle may not last long.
Fourth, the impact of the US interest rate cut on the mainland
After the Federal Reserve released a signal to cut interest rates, international non-dollar assets and stock markets can be said to have ushered in a major positive. In mid-December 2023, the onshore RMB exchange rate rose slightly to 7.1301, further reducing the exchange rate pressure brought to the mainland by the previous cycle of strong US dollar interest rate hikes.
However, the three major domestic stock indexes rose and fell, and A-shares failed to break through the 3,000-point mark, which reflects that the international capital market is still holding a wait-and-see attitude towards the direction of the global economic recovery.
The impact of the decline in U.S. bond yields and the depreciation of the U.S. dollar on the RMB exchange rate may only be highlighted in the second half of this year, and the possibility that the RMB exchange rate will rebound above '7' this year cannot be ruled out.
The mainland's foreign exchange reserves have been negatively affected to a certain extent by the weakening of the US dollar, but the US dollar outflow has also played a certain role in promoting the mainland's investment market, and the pressure on capital outflow will also be reduced.
The Federal Reserve's interest rate cut has an obvious demonstration effect on the global financial market, and many economies around the world, including the European Union, are likely to follow the footsteps of the United States to implement interest rate cuts, which is good news for the mainland's international import industry.
The mainland is one of the world's important trading powers, and the relaxed global economic environment and the recovery of foreign trade can also play a positive role in promoting the domestic economy.
Of course, while seeing the opportunities, we should also pay attention to the problems in development. At present, there is still a certain gap between the mainland and emerging market countries in terms of its ability to attract outflow of foreign investment.
This is mainly due to the fact that there is a certain amount of development pressure in the fields of consumption and export, and foreign capital is still waiting to see the relevant systemic policies of the mainland.
However, because the mainland's exchange rate against the US dollar has not risen much, the impact of monetary factors on the mainland's export trade is very limited, but the US bonds in our hands have really shrunk.
epilogue
The Fed's "dovish" speech has aroused great concern in the global financial market about the imminent start of the interest rate cut cycle in the United States, and the influence of political factors has finally forced the Fed to carry out a small interest rate cut operation this year at a critical juncture when the strong interest rate hike cycle is approaching the end and coincides with the presidential election year.
However, returning to the 2% inflation target and keeping the U.S. economy running smoothly are still the Fed's anchor indicators, and a small rate cut is only a compromise between invigorating the economic environment and controlling the inflation rate.
It is expected that the Fed will cut interest rates by about 75 basis points in 2024, but the leading role of the United States will prompt some major economies around the world to also choose moderate interest rate cuts to ease the pressure on domestic economic development.
For the mainland, the pressure of the decline in the RMB exchange rate and the outflow of foreign capital after the US interest rate cut will be weakened, and international trade and the stock market are also expected to usher in good opportunities for development, but we must be cautious in the face of competition from emerging market countries.
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