Text: Wang Mao, senior editor of Tsinghua Financial Review
Exactly when the Fed will start cutting interest rates, the market's expectations are constantly postponed. The reluctance to cut interest rates while inflationary pressures remain the main reason, and the United States does not want to lose its "weapon" to attract capital inflows because of interest rate cuts. What needs to be noted is that the United States has its own problems, debt default is a big risk, and "stagflation" may have arrived. The timing of the Fed's interest rate cut depends on the movement and game of these factors.
The key to the Fed's long stay of not cutting interest rates: inflation risks remain and funds need to continue to flow in
The Federal Reserve will release the decision of the latest monetary policy meeting in the early morning of May 2, Beijing time, and it can be said that it is certain that the benchmark interest rate will remain unchanged at 5.25%-5.5%. Affected by factors such as the performance of U.S. economic data and the speeches of Fed officials, the market's expectations for the timing of the Fed's interest rate cut have been pushed back again and again. At present, the basic consensus is that the Fed will cut interest rates 1~2 times this year, but there is also a view that the Fed will keep the benchmark interest rate unchanged in 2024.
On April 16, Eastern time, Federal Reserve Chairman Jerome Powell said that the U.S. inflation rate has not yet returned to the target level set by the Federal Reserve. The federal funds rate is likely to remain unchanged at current levels until inflation approaches target. Minneapolis Fed President Neel Kashkari said the Fed must not "stand still" in the fight to curb inflation. He insisted that while the current labor market is not as "hot" as it was a year ago, it remains tight.
The year-on-year growth rate of CPI in the United States from January to March 2024 was 3.1%, 3.2%, and 3.5% respectively, and the upward trend was month-on-month, which shows that the inflationary pressure in the United States is still there, and interest rate cuts may give inflation another boost.
Another key factor in the reluctance of the United States to cut interest rates is that if the United States cuts interest rates, it will lose its "sharp weapon" to attract capital into the United States.
The United States started the current round of interest rate hike cycle in March 2022, with a total of 11 interest rate hikes totaling 525 basis points, and raised the benchmark interest rate to a range of 5.25%~5.5% in July 2023. Such a high benchmark interest rate will undoubtedly push up the dollar exchange rate, pull down the exchange rates of other countries, and allow funds to flow into the United States and flee from other related countries. This is happening now, with the dollar being boosted at a time when the currencies of many Asian countries are depreciating rapidly.
Recently, the yen, South Korean won, Indonesian rupiah, Indian rupee, Vietnamese dong and other countries have plummeted, and the yen, as the largest currency in Asia, fell below the 160 mark against the US dollar in early trading on April 29, hitting a new bottom since 1990. The Vietnamese dong fell to an all-time low against the US dollar.
America's own predicament: stagflation, debt risk
On April 25, local time, data from the U.S. Department of Commerce showed that the preliminary annualized value of real GDP in the first quarter of 2024 was 1.6%, lower than the expected 2.5%. On the price front, the core PCE price index, which excludes food and energy, rose 3.7% q/oq, beating expectations of 3.4% and the first quarterly increase in a year, suggesting that core inflation remains stubborn. The market is worried that the United States has begun to enter "stagflation".
In addition, the debt "crisis" in the United States will intensify. As early as June 2023, Deutsche Bank released a report saying that the wave of defaults in the United States will peak in the third quarter of 2024. By then, the peak default rate for high-yield US bonds will reach 9%, and the default rate for US loans will reach 11.3%, close to the highest level in history.
The only way to avoid default is to continue to borrow, that is, to increase the amount of borrowing. The question is, are U.S. Treasuries attractive in the market? According to a report by the Wall Street Journal in April, the poor outlook for U.S. Treasuries is causing concern among investors.
In April 2024, the United States conducted a $58 billion auction of 3-year Treasury bonds and a $39 billion auction of 10-year Treasury bonds, but the results of the auctions fell short of expectations. The U.S. government also plans to sell $300 billion in debt in May 2024, and there is a high probability that it will be cold.
The old debt is being sold, and there are very few new debts, will the United States let the Ponzi structure of borrowing the new to repay the old be shattered? Of course, the subjective will of the United States does not want it, and once it is broken, the risk of inflation in the dollar's output and the ability to collect seigniorage will be greatly reduced.
At present, the United States continues to harvest some economies with obvious economic structure and financial debt problems, such as Japan. But the progress of events is often not completely predictable.
This article is edited by Wang Mao
Editor-in-charge丨Ding Kaiyan, Lan Yinfan
Preliminary trial丨Xu Lanying
Final Review丨Zhang Wei
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