The Fed continues its swing tone and is expected to cut interest rates, disturbing global markets.

The Fed continues its swing tone and is expected to cut interest rates, disturbing global markets.


After the latest inflation data was released last week, the Federal Reserve once again emphasized that it was in no rush to cut interest rates. However, due to the increasing pressure of high interest rates, rising commercial real estate risks, and continued doubts about employment data, the Fed’s statement is difficult to calm the sentiment of market institutions, and the game of U.S. expectations for interest rate cuts is disturbing the global market.

On March 29, the U.S. Department of Commerce released data showing that the U.S. personal consumption expenditures (PCE) price index rose by 0.3% month-on-month in February, which was slower than the 0.4% increase in the previous month, indicating that the U.S. inflation rate is still declining overall. . Some analysts pointed out that the latest inflation data strengthened market institutions’ expectations of interest rate cuts, and speculated that the Federal Reserve may implement an interest rate cut path of “suspending or slowing down the balance sheet reduction in May, starting to cut interest rates in June, and cutting interest rates three times during the year.”

Unlike market institutions who are “ardently” looking forward to a rate cut, the Fed has not given a clear outlook on the path of interest rate cuts, and continues to swing back and forth in its public statements. In the statement after the regular monetary policy meeting in March, the Fed stated that “if risks arise that may hinder the achievement of goals, it will be prepared to adjust the stance of monetary policy as appropriate.” However, at the subsequent press conference, Fed Chairman Powell believed that long-term inflation Expectations are unstable and “we have not yet gained confidence in various data to start cutting interest rates.”

Some analysts pointed out that factors such as concerns about the recurrence of inflation, the belief that the job market is stable, and the financial market environment is relatively loose are the main reasons why the Federal Reserve insists on not cutting interest rates for the time being. Anticipating that inflation progress will be uneven, the Fed insists the timing of rate cuts “matters.” Powell also said on March 29 that the weakening labor market would be a stimulus for interest rate cuts and that “there are not many signs of employment deterioration.”

However, in the eyes of some market institutions, the Fed’s reasons are not convincing.

From the perspective of inflation data, the core PCE price index increased by 0.3% month-on-month, which was lower than the 0.5% increase in January; it increased by 2.8% year-on-year, which was also lower than the 2.9% in January. Overall, it seems to be in a volatile downward trend, and there is no obvious Fed. A recurring condition of worry.

Judging from the employment data, doubts about the U.S. labor market data are increasing, and even different voices are beginning to emerge within the Federal Reserve system. Last week, the Federal Reserve Bank of Philadelphia released a report stating that the employment data released by the U.S. Bureau of Labor Statistics (BLS) was seriously distorted, and the actual number of new jobs in the 2023 U.S. non-farm employment data was overestimated by 800,000.

From the perspective of the financial environment, the risks brought by high interest rates to the U.S. banking industry have not gone away. Many small and medium-sized banks are facing increasingly serious problems of high financing costs and low profitability. In addition, the vacancy rate of commercial real estate in the United States continues to rise. Because many commercial mortgages were signed 10 years ago when interest rates were low, as mortgages mature, property owners will have a difficult time refinancing in the current high interest rate environment. Once defaults increase significantly, the financial situation of the banking industry will inevitably deteriorate further.

Under high interest rates, the game between the Federal Reserve and some market institutions regarding interest rate cut expectations affects the U.S. stock market, and the global market is also very sensitive to its disturbances.

As the European Central Bank follows the United States in its monetary policy, continued high interest rates have inhibited the economic growth of many European countries, and increased financing costs have reduced corporate profits in most European countries. The Federal Reserve’s delay in cutting interest rates has created uncertainty about whether the European Central Bank will cut interest rates in the future. In early March, the international credit rating agency Moody’s announced that it had lowered the outlook for the banking industry ratings of six European countries, including Germany, the United Kingdom, and France, from stable to negative.

The Bank of Japan is deeply affected by the U.S. monetary policy. Although negative interest rates have been ended, the future direction of Japan’s monetary policy is unclear. Barclays Bank released a research report at the end of March saying that if there is no significant reduction in interest rates in the United States, the Bank of Japan may soon have to continue to raise interest rates to correct the continued weakness of the yen.

For the majority of emerging markets and developing economies, the Federal Reserve’s maintenance of high interest rates has continued to attract a large amount of lending funds that had previously poured into emerging market economies to quickly flow back into the U.S. market. The huge “tide” of US dollars has caused a series of crises such as the rupture of capital chains and currency depreciation, and the pressure to repay debts denominated in US dollars has soared.

In fact, the impact of high interest rates on the Federal Reserve is not small. On March 26, the Federal Reserve released its audited financial report, which showed that the growth of the Federal Reserve’s interest expenses (including the reserve balance of the Federal Reserve’s reverse repurchase operations) almost tripled in 2023, reaching $281.1 billion. Affected by this, the Federal Reserve’s expenses exceeded its income by $114.3 billion last year, the largest operating loss in history. The Fed has repeatedly stressed that net losses will not hamper its operations or ability to conduct monetary policy. How long this determination can last remains to be seen.


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