US rate hike process slows down
In December 2015, the Fed opened a rate hike window to initiate the normalization of monetary policy. By the end of 2018, the Fed has raised interest rates nine times in a row, raising the federal funds rate target range from 0 to 0.25% to 2.25% to 2.5%. Among them, the interest rate was raised once in 2015, the interest rate was increased twice in 2016 and 2017, and the interest rate increased by 4 times in 2018. From 2015 to 2018, the Fed’s rate hike process continued to accelerate, mainly because the US economic fundamentals were relatively good and macro data was relatively strong. In 2018, the US economy grew by 2.9% year-on-year, the fastest growth since the global financial crisis in 2008; the unemployment rate was 4.7%, the best level in nearly 49 years. The Fed hopes to raise the federal funds rate to a satisfactory level as soon as the macroeconomic performance is good, thus freeing up space for monetary policy operations for the next possible economic recession.
Since the beginning of this year, with the divergence of US macroeconomic data, the Fed’s rate hike process has slowed significantly. The US macroeconomic data is still strong this year, and both the economic growth rate and the unemployment rate are at a historically good level. According to data released by the US Department of Commerce, the US economic growth rate in the first quarter was 3.2%, adjusted to 3.1%, far exceeding expectations. In April, the number of new non-agricultural employment in the United States was 263,000, and the unemployment rate dropped further to 3.6. %, the lowest value in nearly half a century. However, data from the US Department of Commerce also indicates that the risk of a downturn in the US economy is increasing. In March of this year, the US core personal consumption expenditure deflator (PCE) increased by 1.6% year-on-year, and there is still a long way to go from the Fed’s target of 2%. After seasonal adjustment, retail sales in April fell by 0.2%. In May, the Manufacturing Purchasing Managers Index (PMI) and the service industry PMI fell sharply. Among them, the manufacturing PMI fell to 50.6%, the lowest since September 2009. The service PMI fell to 50.9%, the lowest since February 2016. . In addition, the new order index has fallen for the first time since August 2009.
On the one hand, it is a better economic growth and employment situation, on the other hand, it is poor consumption performance and PMI data. The differentiation of macroeconomic data has led to differences in macro policy decisions. There has been a strong call within the US government for the Fed to cut interest rates. Some US government officials said that in the case of low inflation, the Fed’s monetary policy should realize the transition from interest rate hike to interest rate cut as soon as possible, and implement the expansionary monetary policy to prevent possible downside risks in the US economy. However, the Fed and the US government have different views. The Fed is still optimistic about the prospects for US economic growth in the medium term. At the monetary policy meeting held from April 30 to May 1, Fed Chairman Powell made it clear that “the current monetary policy is appropriate and there is no big possibility of raising interest rates or cutting interest rates.” This paper predicts that the Fed’s monetary policy operation will shift from “tightening” to “neutral”, and the possibility of raising interest rates or cutting interest rates in the second half of this year is relatively small.
The Fed will continue to shrink
In response to the impact of the global financial crisis, the Federal Reserve continued to implement three rounds of quantitative easing (QE) in 2009-2014. Its main contents include interest rate cuts and expansion of the table: on the one hand, the federal funds rate target range is reduced to an ultra-low level of 0 to 0.25%; on the other hand, the asset purchase plan is implemented, through the purchase of medium and long-term national debt and housing mortgage loans Support securities and provide medium and long-term financial support to the market. The quantitative easing policy caused the Fed’s balance sheet to expand substantially, and its size expanded significantly from less than $1 trillion before the crisis to $4.5 trillion.
Since then, with the gradual recovery of the US economy, the normalization of monetary policy is imperative. The Fed decided to withdraw from the quantitative easing policy, and its implementation methods include raising interest rates and shrinking the two parts. In December 2015, the Fed opened a rate hike window. In October 2017, the Fed began to shrink. The content of the contract is that the Fed sells medium- and long-term government bonds and mortgage-backed securities that it purchased during the crisis to normalize the balance sheet. Shrinking is done in a gradual, predictable way, avoiding market volatility that may be caused by liquidity tightening. In operation, it is a time unit every three months. In the first time unit, the monthly contraction is reduced by 10 billion US dollars. After each additional time unit, the monthly contraction amount is increased by 10 billion US dollars to 50 billion. The dollar is the upper limit. Specifically, in the first time unit to start the contraction, the Fed sells medium- and long-term government bonds and mortgage-backed securities for $10 billion a month; in the second time unit, the Fed sells $20 billion a month. According to this, until the fifth time unit, the Fed’s monthly sales volume increased to 50 billion US dollars, and then maintained this rhythm. The paper predicts that in 2019, the Fed will continue to shrink at a rate of $50 billion in monthly sales of medium- and long-term government bonds and mortgage-backed securities until it believes that the balance sheet has reached the desired level.
Lowering excess deposit reserve interest rates: policy trade-offs and technical operations
Since the Federal Reserve began paying interest on the excess deposit reserve of commercial banks in the central bank in October 2008, the excess deposit reserve interest rate (IOER) and the federal funds rate have been basically the same, and the Fed adjusted the excess deposit reserve interest rate. This is basically in line with the adjustment of the federal funds rate, so that the excess deposit reserve rate is always at the upper limit of the federal funds rate target range.
From October 2008 to December 2015, the Fed kept the federal funds rate target range at 0-0.25% and the excess deposit reserve rate at 0.25%. From December 2015 to December 2018, the Fed raised interest rates nine times in a row, raising the federal funds rate target range from 0 to 0.25% to 2.25% to 2.5%, while raising the excess deposit reserve rate for 10 consecutive times, from 0.5%. Increase to 2.4%. It can be seen that since October 2008, both the period of monetary policy expansion and the period of monetary policy tightening, the adjustment of the federal funds rate and the excess deposit reserve interest rate have always kept pace.
But this situation changed in 2019. At the beginning of May 2019, the Fed announced that it would maintain the target range of the federal funds rate unchanged from 2.25% to 2.5%, while reducing the excess deposit reserve interest rate from 2.40% to 2.35%. This is the first time since December 2008 that the federal funds rate and the excess deposit reserve interest rate have deviated. This divergence is mainly due to the differentiation of macroeconomic data and the divergence of macroeconomic policies. This paper believes that the Fed hopes to increase the size of the loanable funds of commercial banks by reducing the excess deposit reserve interest rate, thereby lowering the market interest rate, and continuing the excess deposit reserve interest rate level as the upper limit of the federal funds rate target range, achieving the call for interest rate cuts. The purpose of the appeal.
US dollar index continues to rise
The US dollar index is the price of the US dollar against a basket of currencies such as the euro, the pound and the yen. After the disintegration of the Bretton Woods system in the early 1970s, the US dollar index experienced three rounds of complete decline cycles and two rounds of complete rise cycles. Since 2012, the US dollar index has entered the third round of rising history in history. This round of the US dollar index continued to rise, mainly for the following two reasons: First, compared with other major developed economies, the US economic recovery is better. In 2012, the US economic growth rate was 2.25%; the average economic growth rate of the EU 28 countries was -0.2%; the average economic growth rate of the 19 countries in the Eurozone was -0.4%; the UK economic growth rate was 1.45%; and the Japanese economic growth rate was 2.0. %. In 2012, the US unemployment rate was 7.7%; the average unemployment rate in the EU and the Eurozone was 10.3% and 11.1%, respectively; the UK unemployment rate was 7.9%. In 2018, the US economic growth rate was 2.9%, the unemployment rate was 3.7%; the euro zone economic growth rate was 2%, the unemployment rate was 8.1%; the UK economic growth rate was 1.4%, the unemployment rate was 4.2%; Japan’s economic growth rate At 1.7%, the unemployment rate was 2.4%. Second, compared with the central banks of other major developed economies, the Fed’s rate hike is relatively fast. From the outbreak of the global financial crisis in 2008 to the end of 2018, the Fed has raised interest rates nine times, the federal funds rate target range reached 2.25% to 2.5%; the Bank of England raised interest rates twice, the interest rate was 0.75%; and the European Central Bank and the Central Bank of Japan Still adhere to the monetary policy stance of expansion, and stick to the zero interest rate policy. In other words, the relatively good economic fundamentals of the United States and the relatively rapid pace of interest rate hikes have caused a reversal of the direction of capital flows, which has caused large amounts of capital to flow back to the US financial market and push the dollar index to continue to rise.
In the short term, the relatively good fundamentals of the US economy and the relatively fast pace of interest rate hikes will continue. Therefore, this paper predicts that the US dollar index will continue to rise in the short term. At present, everyone is concerned about when the rising cycle of this round of the US dollar index will end, or where is the turning point of the US dollar index? The judgment of this paper is that the support for the US dollar to enter the appreciation channel in 2012 is a relatively good fundamental for the US economy. Therefore, the factor that ends this round of the US dollar appreciation cycle should be the real recovery of the Eurozone economy and the Japanese economy. The sign of the real recovery of the Eurozone economy and the Japanese economy is the end of the zero interest rate policy by the European Central Bank and the Central Bank of Japan. This paper predicts that it is unlikely that the Eurozone economy and the Japanese economy will truly recover in 2019, and that the European Central Bank and the Central Bank of Japan are less likely to raise interest rates.
It should be emphasized that if the US dollar index continues to rise in the short term, it will pose challenges to the economic development of some developing countries, especially those countries whose local currency exchange rate is pegged to the US dollar and countries where large debts are denominated in US dollars. At the same time, the continued rise in the US dollar index will also affect US exports, further expand the US current account deficit and trade deficit, and increase trade friction between the United States and other countries.
US Treasury yields are upside down: the economic slowdown is a high probability event, and the recession remains to be seen
On March 22, 2019, US long-end (10-year) government bond yields and short-end (3 month) government bond yields were upside down, the first time since July 2007. The international financial market has followed by large fluctuations. Although the upside down lasted for a short time, the upside down did not stop there. On May 10, 2019, the yields of 3-month and 10-year US Treasury bonds were 2.429% and 2.426%, respectively. The long-term and short-term government bond yields were again upside down; May 28, 3-month and 10-year US Treasury yields were 2.356% and 2.269% respectively; on May 29, 3-month and 10-year US Treasury yields were 2.352% and 2.264%, respectively, and the long-short-end government bond yields were further deepened. As some economists upside down the long-short-end bond yields as a leading indicator of economic recession or financial crisis, the international economics community is currently arguing whether the US economy will fall into recession.
Some economists believe that the US long-term short-term government bond yields have a strong early warning significance. If the upside trend continues, the US economy may fall into recession again, financial markets may experience violent fluctuations, and the financial crisis may come back. Historically, this has happened in the United States: first, the yield of government bonds has been reversed, and after a lapse of one to one and a half years, there has been a recession or a financial crisis. Some economists have described in more detail that in the past 50 years, the three-month and 10-year US Treasury yields have been inversion six times, each time inevitably a recession or a financial crisis. The most typical one is the inversion of Treasury yields from July 2006 to May 2007, which became a strong warning signal for the 2008 global financial crisis. As a result, some investors are worried that the US economy may fall into recession again in the next six to 18 months. Some economists predict that if relevant economic data, including consumption, continues to fall, the “wind vane charm” that is reversed by the yield of government bonds will be fulfilled again.
Other economists disagree with this view. They believe that after the global financial crisis in 2008, major changes have taken place in the US macroeconomic and financial markets. The inversion of US Treasury yields has lost its predictive effect and it is difficult to continue to be the leading indicator of the US economic recession or financial crisis. Especially strong warning signals. Some economists have suggested that this round of US Treasury yields upside down means that the world economy has entered a new normal; global inflation levels continue to be low, and central banks are suppressing long-term interest rates in different ways. This is the yield of US Treasury bonds. The main reason for the rate of upside down. They believe that because this round of US Treasury yields lasts for a short period of time, it lasts only about one week in March and only about 20 days in May. Therefore, it is necessary to judge whether the US economy will fall into recession. Macroeconomic performance in the second and second half of this year.
This paper believes that the long-term government bond yield can indeed reflect the market’s expectation of the future macro economy, but the short-term government bond yield will be more affected by the macro policy trend, so the long-term short-term government bond yields are actually market expectations and policies. Adjust the results of the joint effect of the two factors. In the recent period, due to the frequent adjustment of US macroeconomic policies, the long-short-end government bond yields are not enough to determine that the US economy is going to fall into recession, and it is not enough to show that the global financial crisis will come back. Another important factor to consider is that since the second half of 2018, the global economic situation has changed rapidly, the international financial market has fluctuated drastically, geopolitical tensions have reappeared, and a large amount of funds have flowed into the US long-term national debt due to the impact of global risk aversion. The market has also depressed the long-term interest rate to some extent. Judging from this, the US Treasury yields in March and May of 2019 are upside down, indicating that the US economic slowdown will be a high probability event in the future, but it is still too early to conclude that the US economy will fall into recession.