Federal Reserve has recently announced that it will maintain the benchmark
interest rate unchanged at 0%-0.25%, in line with market expectations. The Fed
has pledged to continue its asset purchase program at least at the current pace
of USD 120 billion per month until employment and price stability goals make
substantial progress. Fed Chair Jerome Powell stated that if current trends
continue, the Fed may soon be able to reduce the size of its debt purchases. The
Fed will gradually reduce its debt purchases, which will end around the middle
of 2022. From this point of view, the Fed has already begun preparations to
tighten the easing, and it may start within this year.
same time, market participants are also expecting the prospect of
future interest rate hikes to be earlier than previously
estimated. The latest dot matrix chart released by the Fed shows that 9 FOMC
members are expected to raise interest rates for the first time in 2022. In
summary, 7 members support rate hikes, while the number of members who believe a
delay in interest rates should extend until 2023 is 17,
which is 4 more members than in June. The Fed may tighten monetary policy
sooner than predicted as a result of strong inflation and market stability, as
seen by this meeting. However, unlike the scenario of the start
of easing, the Fed will face more challenges and troubles withdrawing from
the easing policy, and this process will be full of uncertainty.
information released by the Fed meeting reflects the Fed's cautious attitude
on plans to withdraw from the stimulus policy. Judging from the
current economic recovery in the United States, it seems that the problem
is not so simple. The prerequisite for the Fed's reduction of easing is
"continuous progress" in employment recovery. At the same time, the Fed also
emphasized that even if the reduction is initiated, once the situation recurs,
it is still possible to restore the scale of QE. As a result, while the
Fed has indicated that it may begin the reduction, when and how much it will
reduce is dependent on the U.S. economy's recovery and changes in inflation. Needless
to say, there are still many uncertainties ahead.
Fed officials now believe that the core inflation rate will rise from 3%
predicted in June to 3.7% at the end of this year. Officials foresee that the
inflation rate will slow to 2.3% in 2022, compared to a 2.1% estimate
in June; it will slow to 2.2% in 2023, compared with 2.1% in June's forecast.
Due to the continuous spread of the Delta variant of the novel coronavirus and
the distortion of the global supply chain, the Fed has lowered its economic
growth forecast. It currently predicts that U.S. GDP will grow by 5.9% this
year, lower than the 7% predicted in June. They expect the unemployment rate to
remain around 4.8% in the fourth quarter, higher than the 4.5% forecast in
June. This change has reduced the possibility of the Fed's reduction of easing.
With high inflation levels, the Fed has always emphasized the preconditions for
the adjustment of monetary policy due to employment and economic recovery. In
the context of slowing economic growth, why did it propose the prospect of reducing
easing? Is it because its employment target has been achieved? This reason may
be difficult to establish. Therefore, there is the suspicion that the Fed is
more worried about the emergence of a future "stagflation" scenario,
which may not be an optimistic signal for the U.S. economy.
U.S. economy recovers less than expected and inflation continues to remain
high, the Fed's future policy choices will be even more uncertain. At present,
the separation of inflation and employment has caused divergence in views and
policy choices on the prospects of the U.S. economy. The Fed can only
rely on the thought that inflation is temporary to maintain its current easing
policy to achieve its monetary policy goals. Whether this reason can be
established or not depends on how long the current "high inflation"
can last. If inflation falls in the first quarter of next year, the Fed's
urgency to end easing will be greatly reduced.
result of the pandemic, employment and inflation have grown more structural,
reflecting fundamental challenges in the U.S. economy, while the use of
monetary policy to support economic recovery has also proven challenging. Therefore,
the biggest uncertain factor for the Fed is still the pandemic. COVID-19 not
only has an impact on consumption and employment but has also messed up the
supply chain. These factors may not be able to be brought under full control in
the short term. This is probably the main factor that makes it difficult for
the Fed to reduce easing with clear expectations.
years of monetary easing, the imbalance in the U.S. economy has become more
visible, and the impact of the pandemic has made this differentiation more
prominent than ever. In this case, the role and effect of monetary policy are declining,
and its role is more reflected in changes in asset prices. With the continuous
expansion of the U.S. capital market, it is increasingly difficult to withstand
the reduction in liquidity and the increase in interest rates. With the Fed
becoming more and more swayed by the capital market, whether it can smoothly
withdraw from the easing is still a major challenge. Even if the Fed could
start the reduction as scheduled, the process will be relatively long, and the
cycle might repeat itself. As far as the Fed is concerned, whether it can start
to withdraw from the loose policy as scheduled and achieve the
normalization of monetary policy is still full of challenges.
the Fed has proposed the prospect of reducing the easing policy, it is still
full of uncertainties in achieving such a process. It depends not
only on changes in the U.S. economy but also on changes in the capital market.
For the realization of this process, the market needs to be more cautious.
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