The Federal Reserve's announcement on Wednesday to keep its benchmark interest rate unchanged will cause problems for the monetary policy of the yuan

Mars macroscopic

2024-06-14 01:05Posted in Hunan Finance and Economics Creator

Executive Summary:

In the announcement of its monetary policy meeting on 12 June, the Fed announced that it would keep the existing benchmark interest rate unchanged at 5.25%-5.5%. The Fed needs more confidence in returning core inflation to its 2% policy target and lowers its rate cut expectations to one this year. The Fed's postponement of interest rate cuts, which is expected to reduce the number and magnitude of interest rate cuts, will cause problems for the space for RMB monetary easing.

1. In the announcement of the monetary policy meeting on June 12, the Federal Reserve announced that it would maintain the existing benchmark interest rate of 5.25%-5.5% unchanged.

Previously, the market expected interest rate cuts in March, May, and June, all of which were defeated by the stickiness of U.S. inflation, because the Federal Reserve meeting that ended on June 12 announced that the existing benchmark interest rate of 5.25%-5.5% would remain unchanged. He also explained that although inflation has fallen further to the target level in recent months, it remains high.

In the statement, issued after the two-day meeting, the Fed also noted that the economy is growing steadily, while job hiring remains strong. Officials also noted that "modest further progress" has been made in recent months towards the 2% inflation target.

This is more positive than the Fed's assessment after its last meeting on May 1, when officials expressed concerns about the "lack of further progress" on inflation.

As expected, policymakers left the key interest rate unchanged at around 5.25%-5.5% on Wednesday. The benchmark interest rate has remained at this level since July last year, after the Federal Reserve raised interest rates 11 times from March 2022 to July 2023 in an attempt to slow borrowing and consumption and tame inflation.

Over time, the Fed's interest rate cuts will make loans cheaper for consumers. They have been facing high interest rates on mortgages, car loans, credit cards, and other forms of borrowing.

Second, the Fed needs more confidence in returning to its 2% policy target for core inflation, and lowers its interest rate cut expectations to one this year.

And the market's expectation of three interest rate cuts this year is also trembling. Because on Wednesday, the Federal Reserve also issued a warning to the market in its announcement, saying that it may only cut interest rates once this year.

Officials' rate cut projections reflect the personal estimates of 19 Fed policymakers. Eight of them expect two rate cuts, seven expect one rate cut, and four others say they don't expect to cut rates at all this year.

The Fed's updated quarterly forecast was not finalized in time. Policymakers often revise their plans to cut or raise interest rates, depending on how economic growth and inflation indicators evolve over time.

In early May, Fed Chairman Jerome Powell said the central bank needed more confidence in returning core inflation to its 2% policy target before cutting its benchmark interest rate. Powell noted that it may take more time to gain that confidence than Fed officials previously thought.

Last month, Christopher Waller, an influential member of the Fed's Board of Governors, said he needed to see "a few months of good inflation data" rather than a month before considering supporting a rate cut.

Although Waller did not specify what good data is, economists believe that core inflation must not exceed 0.2% per month or lower month.

The US CPI rose 3.3% year-on-year in May, down 0.1 percentage points from the previous month's increase and estimate. Month-on-month, it was flat and down from the 0.3% month-on-month increase in the previous month, and the market was expecting a 0.1% increase.

Saburo believes that if the month-on-month increase in CPI can continue to be lower than 0.2% from June to August, the Fed will end the dollar interest rate hike cycle that began in March 2022 in September, and announce the first interest rate cut, starting a new round of dollar interest rate cut cycle. The number of interest rate cuts during the year, up to a maximum of 2 times.

Third, the Fed has postponed interest rate cuts, and it is expected that the number of interest rate cuts will be reduced and the magnitude of interest rate cuts will be reduced, which will cause problems for the space for RMB monetary easing.

At present, the interest rate spread between China and the United States continues to widen, the inflow of foreign capital has slowed down, and the outflow of foreign capital has accelerated, and the red line of 7.2 against the US dollar that the central bank has pressed for half a year has been broken, and it has fallen to 7.2519 on Thursday afternoon.

If the PBOC follows market expectations and continues to cut interest rates sharply, it will further widen the spread between Chinese and US government bonds, stimulate capital outflows, and promote the depreciation of the RMB. This will increase our foreign debt burden, which is not conducive to establishing a stable international image of the renminbi, and is very detrimental to promoting the internationalization of the renminbi and expanding the scope and scale of its use.

In the difficult situation that exports are facing the diversification of supply chains and the imposition of tax rates on some of our export commodities by Europe, the United States and many southern countries, if we stop cutting interest rates and guide the RMB exchange rate to rise by continuing to sell US bonds to buy RMB and through measures such as lower RMB parity, it will severely hit our commodity exports, resulting in the overproduction caused by insufficient domestic demand that cannot be resolved and eased through exports, and then affecting economic stability.

[Author: Xu Sanlang]

View original image 172K

• 

• 

• 

• 

• 

• 

Personal opinion, for reference only