Depth report

　　

The Federal Reserve’s March monetary policy meeting decided to raise interest rates by 25 basis points and raise the federal funds target interest rate range to 1.50%-1.75%, in line with market expectations. The Fed's resolution stated that it is expected to raise interest rates more steeply in 2019-20.

    What is the impact of the Fed's interest rate hike on the global economy? Since the beginning of 2018, many domestic and foreign research institutions have analyzed this issue. The research focuses on several aspects: Is the current global economic recovery sustainable? What is the impact of trade protectionism on the global economy? What economic policies will countries adopt?

    1. The strong recovery of the global economy: real or illusory?

    The global economy is recovering strongly. The current controversy is whether this is a real recovery or a phantom short-lived? Can the recovery process continue in 2018? This article believes that the rapid global economic growth since 2017 is a real recovery, especially for the major developed countries that have been hit by the crisis, and the world recovery process in 2018 will be further accelerated.

    The macroeconomic indicators have improved significantly. First, the unemployment rate in the United States has fallen sharply from 10.5% during the crisis to 4.1%, the best level since 2000, and is very close to the full employment target of about 4%; the US inflation rate is 2% and the core inflation rate is 1.8%, which is basically achieved. The target of price stability is around 2%; the US economic growth rate in 2017 was 2.3%, which is lower than Trump’s 3% growth target, but far higher than the 2016 1.5% growth rate. Taking into account the successive implementation of policies such as the "Trump New Deal" tax cuts, increased infrastructure investment, development of manufacturing, export doubling plans, and financial deregulation, the U.S. economic growth rate may further accelerate in 2018. Second, after the UK referendum to leave the European Union, the whole world is full of pessimism about the prospects of the UK’s economic growth. However, the UK’s macroeconomic performance has recently been expected. The unemployment rate in the UK has dropped sharply to 4.6%, a 42-year record low, which was 1975. The best level since the year; the inflation rate is 3%; the British economic growth rate in 2017 was 1.8%, and according to the Bank of England’s forecast, the British economic growth rate in 2018 was 1.7%. Third, Japan’s economic recovery is significantly better than expected. The current unemployment rate in Japan is 2.7%, a record low in 24 years and one of the lowest unemployment rates in the world. The inflation rate is 0.6% and the economic growth rate is 1.7%, the highest in recent years. Rapid increase. Fourth, the average inflation rate in the euro area was 1.5%; the unemployment rate dropped sharply from 15.5% during the crisis to 8.7%, the best level since 2009; the average growth rate of the euro area economy in 2017 was 2.2%.

    The global economic recovery is accelerating. In 2017, the International Monetary Fund (IMF) raised its forecasts on the average growth rate of the global economy and the growth rate of most countries twice, and raised the average growth rate of the global economy in 2017 and 2018 to 3.6% and 3.5%, which is six years. Increased for the first time. In January 2018, the International Monetary Fund once again raised its estimates for global economic growth in 2018 and 2019 to 3.9% and 3.9%. The Organization for Economic Cooperation and Development (OECD) predicts that the average global economic growth rate was 3.5% in 2017 and 3.4% in 2018. Although lower than that of the International Monetary Fund, this is the average growth rate of the OECD to the global economy since 2011. The highest predicted value. This article believes that the global economic growth in 2017 is the real recovery since 2010 and the fastest growth since 2011. In 2018, the global economy will usher in a full recovery after the crisis.

    The industrial technological revolution will drive the world economy into a new round of growth cycle. The Internet revolution that occurred in the early 1990s once drove high growth and low inflation in the global economy, and entered a growth cycle of about 10 years, which greatly changed the way of life, work and even thinking of human beings. This article believes that the current technological innovation driven by the information revolution, new energy, artificial intelligence, and biopharmaceuticals is driving a new round of industrial technology revolution that is being bred and breakthroughs. Once breakthroughs occur in these areas, new production methods, business models, and growth drivers will be formed, pushing the world economy into a new round of growth cycle after the crisis.

    2. International trade returns to growth: Is it regional or global?

    Since the 1990s, under the impetus of globalization, the rapid development of international trade has brought about the prosperity of the entire world's manufacturing industry. The global financial crisis that occurred in 2008-2009 severely hit international trade, causing the growth rate of international trade to drop from 7.1% in 2007 to 2.4% in 2016. The main reasons for the sharp decline in international trade are: first, the slowdown of world economic growth; second, the decline in global total demand; third, the rise of trade protectionism. The weak growth of international trade is actually a reflection of the weakness of the global economy.

    With the recovery of the world economy, the level of global total demand has risen rapidly. Although the ideological trends of "protectionism" and "free trade" are still being debated, and policies are still in the game; although some people still question that the recovery of international trade is only regional rather than global, there have been many cases around the world since 2017. Indicators show that international trade is recovering strongly. Since 2017, the Baltic Dry Bulk Freight Index (BDI) has been rising all the way, and recently exceeded 1,700 points, the best level since 2014. The Baltic Dry Bulk Freight Index is the world's authoritative index for measuring international shipping, and it is also a leading index reflecting international trade. The Organization for Economic Cooperation and Development predicts that global trade will increase by 4.6% in 2017. The World Trade Organization (WTO) predicts that in the first half of 2017, global trade imports will grow by 9.6% and exports will grow by 8.6%. Among them, 87% of countries have positive export growth, and 90% of countries have positive import growth. These data show that the international trade recovery is global rather than regional, and the trend of international trade returning to growth in 2018 has been irreversible.

    3. Direction of monetary policy operation: convergence or differentiation?

    After the outbreak of the global financial crisis, in order to cope with the impact of the crisis, the monetary policies of the world's major economies have rapidly converged. Central banks of various countries have successively adopted either expansionary or extreme expansionary monetary policies, and implemented various unconventional policy tools to deal with crises and recessions. After the crisis, due to differences in the economic recovery of different countries, the direction of monetary policy operations of central banks in various countries began to diverge.

    Monetary policies in developed countries are divided. On the one hand, the Federal Reserve and the Bank of England implemented monetary policy tightening by raising interest rates. In December 2015, the Fed opened the window for raising interest rates. So far, the Fed has raised the federal funds rate by 125 basis points five consecutive times, increasing the federal funds rate from 0-0.25% to 1.25%-1.5%. In November 2017, the Bank of England announced that it would raise the central bank's benchmark interest rate by 25 basis points, from 0.25% to 0.5%. This is the first interest rate hike by the Bank of England since 2007. On the other hand, the European Central Bank and the Central Bank of Japan not only implemented monetary policy expansion through successive interest rate cuts, but also introduced “negative interest rate” policies in 2014 and 2016 respectively on the basis of the quantitative easing monetary policy (QE).

    Monetary policies in developing countries are divided. On the one hand, countries such as South Korea, Turkey, Chile, and New Zealand chose expansionary monetary policies after the crisis, and continued to cut interest rates to promote their own economic growth. On the other hand, economies such as Brazil and Russia have opted for contractionary monetary policies, by raising interest rates sharply in response to inflation, attracting foreign capital inflows, and promoting the recovery of their own economies. After the crisis, the benchmark interest rate of the Central Bank of Russia was as high as 10.5%, and the benchmark interest rate of the Central Bank of Brazil was as high as 14.25%. However, with the economic recovery, the Central Bank of South Korea and the Central Bank of Canada have recently started raising interest rates; the Central Bank of Russia and the Central Bank of Brazil have cut interest rates to 9% and 10.25%, respectively.

    4. Macro policy combination: "Tight and tight match" or "Tight and loose match"?

    In the global financial crisis and subsequent economic recession, many countries, especially the major developed economies, chose basically the same combination of macro policies, that is, "expansionary fiscal policy + expansionary monetary policy." With the recovery of the world economy, the macro policy mix has diverged. This article believes that the divergence of the macro policy portfolio of various countries in 2018 may further expand. Judging from the current situation, the Trump administration’s policy mix is “lenient fiscal policy and tight currency”, that is, “expansionary fiscal policy + contractionary fiscal policy”. The policy mix in the Eurozone is a "tight loose mix", that is, "a small expansion of fiscal policy + extremely loose monetary policy". The Japanese government's policy mix is also "tight and loose", but it is slightly different from the Eurozone. Japan's fiscal tightening is even greater, that is, "gradual tightening of fiscal policy + continued expansion of monetary policy." The policy combination of the British government is "loose and tight collocation", that is, "expansionary fiscal policy + contractionary monetary policy", which is basically consistent with the policy combination of the US government.

    While the Trump administration and the British government continued to maintain expansionary fiscal policies, they successively implemented contractionary monetary policies. On the one hand, the economic recovery in the United States and the United Kingdom is relatively good; on the other hand, the inflation rate in the United States and the United Kingdom has shown an upward trend. For example, the general inflation rate in the United Kingdom has risen to 3%. In order to prevent possible inflation, the Federal Reserve and the Bank of England have raised interest rates one after another. For European countries with relatively slow economic recovery, the policy combination of “loose-loose collocation” was changed to “tight-loose combination”, and the expansion of fiscal policy was reduced, mainly due to the convergence criteria of the Maastricht Treaty. constraint. The Maastricht Treaty’s convergence standard requires that the fiscal deficit of the member states of the Eurozone shall not exceed 3% of the GDP, and the government debt shall not exceed the domestic GDP. 60% of the gross production value. At present, the relevant indicators of some Eurozone member states have far exceeded the convergence standard of the Maastricht Treaty. For example, the proportion of Greek government debt to GDP used to be as high as 135%. For this reason, when the economy recovers, the first thing that the euro area countries need to do is to reduce the expansion of fiscal policy in order to maintain the legitimacy of the 19 countries in the euro area. The main reason why the Japanese government took the lead in implementing fiscal austerity is that Japan's government debt accounts for 254% of GDP, the highest in any country in the world. While tightening fiscal policies, the European Central Bank and the Central Bank of Japan still adhere to extremely expanded monetary policies to stimulate economic recovery. At present, the European Central Bank and the Central Bank of Japan are continuing to implement the "quantitative easing + negative interest rate" policy.

    5. Will the Fed change of command change the interest rate hike process?

    This year marks the tenth anniversary of the global financial crisis. From the beginning of the crisis to the end of the crisis, the Federal Reserve has experienced three chairmanships, namely Ben Shalom Bernanke, Janet L. Yellen and Jerome. Powell (Jerome Powell). When the US economy was in crisis in 2008, Bernanke used unconventional operations to kick off the quantitative easing policy. When the U.S. economy gradually recovered in 2015, Yellen initiated the exit process by raising interest rates and shrinking the balance sheet; as the recovery accelerates, Powell will complete the normalization of the Federal Reserve's monetary policy during his tenure. The Bernanke era has gone, and now everyone is concerned: from Yellen to Powell, will the Fed change of coaching change the process of raising interest rates?

    When Yellen became chairman of the Federal Reserve in 2014, she was faced with the extremely loose zero interest rate policy and a huge balance sheet left by Bernanke. How to end the unconventional operation and how to withdraw from the easing policy of volume goods is the test that Yellen faces directly. In December 2015, Yellen took the lead in opening the interest rate hike window and ended the zero interest rate policy. So far, the Fed has raised interest rates five times in a row. This article believes that from Yellen to Powell, the Fed's change of coach will not change its interest rate hike process. In fact, since becoming a member of the Federal Reserve Board in 2012, Powell has been a reliable ally of Yellen. Powell has never voted against the monetary policy vote, and his speech has never deviated from the consensus of the Federal Reserve Board of Governors. Although Yellen and Powell belong to the Democratic and Republican camps, Powell is more neutral than the dovish Yellen. Some media call Powell the "Yellen of the Republican Party." At his inauguration ceremony in February 2018, Powell promised that he will do his best to achieve the Fed’s two “key goals”, namely, to promote full employment and maintain price stability, while maintaining the Fed’s independence and non-partisan nature. This article believes that Powell will continue the policy stance of the Yellen period, maintain the continuity of monetary policy, and support the Fed to continue to cautiously and gradually normalize monetary policy. In 2018 and 2019, the Fed may raise interest rates about three times a year, and raise the Fed's benchmark interest rate to about 3% by the end of 2019.

    6. The Fed's balance sheet reduction: content, method, operation and impact?

    In response to the impact of the global financial crisis, the Fed implemented three consecutive rounds of quantitative easing from 2009 to 2014. The main content is to cut interest rates and expand the balance sheet. That is, while substantially reducing the federal funds rate, the asset purchase plan is implemented. After the Federal Reserve lowered the federal funds rate to zero in 2009, it began to implement the asset purchase plan, that is, through large purchases of medium and long-term Treasury bonds and home mortgage-backed securities (MBS) to provide financial support to the market, which resulted in a substantial expansion of its balance sheet .

    For this reason, the Fed's withdrawal from the quantitative easing policy also includes two parts, one is to raise interest rates, and the other is to shrink the balance sheet. At present, the market is concerned about the content, method, operation and impact of the Fed's balance sheet reduction. In October 2017, the Fed officially began to reduce its balance sheet. The content of the balance sheet reduction is that the Fed sells its medium and long-term Treasury bonds and mortgage-backed securities in order to normalize its balance sheet. The method of shrinking the balance sheet is "in a gradual and predictable manner" to avoid market panic that may be caused by excessive monetary policy adjustments. The specific operation of the balance sheet reduction is: In the first quarter of the balance sheet reduction, the medium and long-term Treasury bonds and mortgage-backed securities held by the Federal Reserve are sold for US$10 billion each month. Starting from the second quarter of the scale reduction, the scale of scale reduction has increased by US$10 billion every quarter until it is reduced by US$50 billion each month. Then, follow the pace of shrinking the balance sheet by $50 billion per month until the Fed believes that the balance sheet size has reached its desired level. There is no doubt that the Fed's interest rate hike and balance sheet reduction will have varying degrees and different directions on the U.S. economy, U.S. financial markets, and even the world economy and international financial markets. One of the most direct effects is the trend of the U.S. dollar index.

    7. Will the U.S. dollar index continue to appreciate?

    Since the disintegration of the Bretton Woods system in the early 1970s, the US dollar index has experienced three complete depreciation cycles and two complete appreciation cycles. Since 2012, the U.S. dollar index has entered the third appreciation cycle in history, resulting in the continued appreciation of the U.S. dollar.

The main reason is that compared with other major developed countries, the U.S. economy has recovered better and the Federal Reserve took the lead in normalizing monetary policy.

    In other words, after the crisis, due to the relatively good fundamentals of the U.S. economy and the market’s strong expectations of the Fed’s interest rate hikes, the direction of international capital flows was reversed. A large amount of international capital returned to the U.S. financial market, pushing up the U.S. dollar index.

    Since 2017, due to the rise in the exchange rate of the euro, the US dollar has weakened relatively. There is a view that this means that the dollar appreciation cycle is over and the euro will enter the appreciation channel. This article believes that based on the current situation, this view is still difficult to establish. Because the Fed has raised interest rates five times in a row, and at the same time it has begun to shrink its balance sheet. In an environment of ever-tightening monetary policy, the U.S. economy still maintains relatively strong growth. In contrast, the European Central Bank has been implementing a "quantitative easing policy + negative interest rates", using extremely loose monetary policies to stimulate economic recovery. Therefore, the recent relatively rapid growth of the European economy has been achieved to a certain extent by relying on external stimulus. This article believes that the fluctuations in the international foreign exchange market since 2017, including the appreciation of the euro and the decline of the US dollar index, are short-term adjustments in the international foreign exchange market. Due to the relatively good economic fundamentals of the United States and the relatively rapid pace of the Fed’s rate hike, the U.S. dollar index will continue to appreciate in 2018.

    8. International bulk commodity price fluctuations: hovering low or rising sharply?

    In recent years, international bulk commodity prices have fluctuated sharply. The current market is concerned about whether the fluctuations in international bulk commodity prices will hover at a low level or will rise sharply in 2018? This article believes that if the 2018 U.S. dollar index still maintains an appreciation trend, or if the U.S. dollar index is still in an appreciation cycle in 2018, then international commodity prices will remain low. Because the U.S. dollar is the main denominated currency for commodities, in the appreciation cycle of the U.S. dollar index, although international commodity prices will rise or fall, on the whole, there is limited room for growth. For this reason, this article believes that international commodity prices will remain low in 2018.

    What economists care about is whether the expectations and judgments of international commodity price trends have macroscopic and policy significance? This article believes that the analysis and forecasting of the price trend of bulk commodities has very important macroscopic and policy significance. Because international oil prices and international food prices in international commodity prices will enter the consumer price index basket of various countries and occupy a large proportion, changes in international commodity prices will affect each country's inflation expectations and inflation levels , Which in turn affects the adjustment of national macro policies.