Niu Wenxin: Powell is a "dangerous person"? — The intention behind the Fed's inversion

Niu Wenxin, chief commentator of China Economic Weekly

After five consecutive days of rebound, on September 28, the US stock market once again fluctuated, with the Nasdaq Composite falling 2.83%, the S&P 500 falling nearly 2.04%, and the Dow Jones falling 1.63%. The reason for this is that the market generally believes that the US 10-year Treasury yield has risen sharply again, and from yesterday's situation, the market has risen to a high of 1.558% intraday and is close to a three-month high. The US 10-year Treasury yield reached a height of 1.8% last year and has been falling since then, but why is it starting to climb rapidly again?

Investors may think that US inflation will continue to climb in the future. In fact, the Fed has recently made a noise: it may start to reduce bond purchases as soon as November, and it may complete "zero delivery" in the middle of next year. In addition, Bullard, the fed's "top hawk" figure and president of the Federal Reserve Bank of St. Louis, has recently made frequent remarks, arguing that after the Fed stops buying bonds in 2022, it should need two interest rate hikes. Obviously, such remarks will have a strong impact on the US stock market and bond market, and the adjustment of the US stock market and bond market in the past is actually a reflection of this expectation.

Does the Fed really want to end its "bond-buying program" as soon as possible? Or even by raising interest rates and shrinking the balance sheet to suppress the high level of CPI? Judging from recent reports, at least Powell is "unwilling" about the change from a pigeon to an eagle. Because of this, Wall Street believes that Powell has become involuntary. Coupled with the fact that the Fed is facing a change, US Treasury Secretary Yellen is supporting Powell to continue to serve as fed chairman. At this time, Powell can't get too stiff with congressional Republicans. After all, there is currently a general consensus among Congressional Republicans that the Fed should withdraw from stimulus as soon as possible and turn to inflation concerns.

The latest news: During the Senate hearing, Powell was single-mindedly talking about raising the ceiling on the U.S. Treasury debt and sternly warned Congress that if the U.S. government defaulted, it would have disastrous consequences. But Powell said nothing about the Republican concerns about inflation and the associated reduction in the balance sheet, so much so that some Republican senators argued that Powell was a dangerous man and that he should not continue to serve as Fed chairman.

On the one hand, the Fed is shrinking its debt purchases and even its balance sheet; on the other hand, it is raising the US government's debt ceiling. Is there a contradiction between the two? If the Fed stops buying bonds and the government sells Treasuries in large quantities, does that signal a sharp rise in U.S. Treasury yields? Does it portend a tragic plunge in the U.S. stock market? The Fed will not allow that to happen. Because, such a scene, far worse than the rise in CPI. That is to say, the Fed must "choose the lesser of two evils", and grasping such a balance requires very high management skills.

The question is: Are the U.S. Treasury and the Fed okay this time? Judging from the current situation, the control is quite remarkable. At least what you see is that the US stock market correction and the rise in the yield on the 10-year Treasury note have not been "out of control".

Why are neither Yellen nor Powell willing to continue to respond to the Republican Party's concern about inflation? One important thing to know: Yellen, Powell, and their two predecessors, Bernanke, were all exponents of Neo-Keynesianism. For the neo-Keynesians, inflation must be "analyzed on a case-by-case basis" and cannot simply be attributed to monetary problems. For now, the main reason for the current price increase is that the supply chain has been mismatched due to the epidemic. That is, short-term price increases due to insufficient supply, such price increases, we must patiently wait for the global supply chain to return to normal, rather than tightening the currency.

So why did Powell also agree to "reduce debt-buying programs and future monetary tightening"? First, if the global supply chain can really return to normal in November, then the special stimulus policy that constitutes a special period of course needs to be withdrawn, and it must be withdrawn in a planned and step-by-step manner, not a 180-degree U-turn; second, the currency tightening is relative, even if the United States raises interest rates 6 times, the absolute interest rate height is only between 1.5% and 1.75%, and such an interest rate height is high or low relative to its history. Is it loose or tight?

It can be roughly expected that Powell will be "dangerous" again, and I am afraid that he will be re-elected as chairman of the Federal Reserve. After his re-election, the fiscal and monetary line of the United States will continue, but the degree will vary from case to case and from time to time.

Why say this? In fact, I hope to remind the people of the country: First, the actions of Fed Chairman Powell are more dangerous to the United States? Or is it more dangerous for China? Second, should the Chinese authorities deliberately expect the United States to go wrong in setting fiscal and monetary policy? At the very least, you need to have more control over the effectiveness of your policies.

Editor-in-charge: Yao Kun

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