- 2018-10-29
Fed's interest rate hike and shrinking schedule
According to the Fed’s latest forecast, the median federal funds rate will rise to 1.4% by the end of this year, and it will raise interest rates three times in 2018, and it is expected that it will still be about three times in 2019. This is basically the same as the interest rate hike plan announced in March this year. This means that after this interest rate hike, the Fed may raise interest rates once again this year. Some analysts believe that the time may be in September this year. At the same time, since the current US interest rate level is still at a historical low and the US can withstand higher interest rates, the Fed may also raise interest rates or shrink the balance sheet faster.
At the same time, as the global economy enters a steady recovery track, fears of low growth and low inflation are fading. Other major global central banks, such as the European Central Bank, the Bank of Japan, and the Bank of England, have no intention of continuing to ease monetary policy. After the financial crisis The large-scale loose monetary policy of China is tending to gradually ebb.
Further relaxation is difficult to reproduce
At present, the world's major central banks have almost ruled out the possibility of further interest rate cuts and indicated that they are carefully considering withdrawing from stimulus policies. The European Central Bank is expected to release a clearer exit signal in the second half of the year. Although the Bank of Japan has no intention of exiting the stimulus policy soon, it is also considering improving communication to inform the public that the central bank is thinking about how to finally exit the easing policy. Officials of the Bank of England expressed that they are considering gradually removing the loose monetary policy in the next few years, but it is expected that this assessment will also take into account the impact of factors such as Britain’s “Brexit”.
The European Central Bank’s most recent monetary policy meeting decided to maintain the three key interest rates in the Eurozone unchanged, that is, the main refinancing operation interest rate, marginal lending interest rate, and time deposit interest rate remain at zero, 0.25%, and negative 0.40%, respectively. The European Central Bank also decided that the current asset purchase plan of 60 billion euros per month will last at least until the end of this year.
The European Central Bank also fine-tuned its forward-looking guidance. It deleted the statement about the expected further interest rate cuts in its monetary policy statement, and only retained the statement that "we expect to maintain interest rates at the current level for a considerable period of time." But Draghi denied that the adjustment of forward-looking guidance is a signal for the European Central Bank to withdraw from the ultra-loose monetary policy? He said that the adjustment of forward-looking guidance on interest rates was because the risk of deflation in the euro zone "has absolutely disappeared", and that the European Central Bank Council did not discuss the issue of exiting quantitative easing and the normalization of monetary policy that day.
However, some analysts believe that based on the positive effects of growth and employment on boosting inflation, the possibility of the European Central Bank gradually withdrawing from the ultra-loose monetary policy has increased, but the actual pace of action may be slower than market expectations. The European Central Bank may release a clearer exit signal in the second half of the year. The interest rate meeting in September is an important node. The latest economic forecast report will be announced at that time, and the existing bond purchase plan will expire in December. Communicate with the market about the continuity of the bond purchase plan?
Weidmann, a member of the European Central Bank’s board of directors and the governor of the German central bank, has also said many times recently that the “exit issue” cannot be left unresolved for a long time? He pointed out that QE has made the euro system the largest creditor in the euro area. The European Central Bank and the central banks of the member states may eventually be forced by political pressure to extend the ultra-loose monetary policy for too long, beyond its necessity?
The Bank of England hinted in May that the first interest rate hike may be in the fourth quarter of 2019, and said that tolerance for inflation to exceed the target level will be limited. Analysis believes that this means that if the UK's "Brexit" process goes smoothly, the Bank of England may also accelerate the pace of interest rate hikes.
Spillover effects attract attention
The Fed's interest rate hike and balance sheet reduction plan will likely trigger capital flows and exchange rate fluctuations and other spillover effects that will continue to attract attention from the outside world, and many central banks are actively thinking about and preparing countermeasures.
The European Central Bank's recent report believes that due to the high integration of the two major markets in Europe and the United States, the Fed's financial policies such as raising interest rates and shrinking the balance sheet have a strong spillover effect on the euro zone, bringing uncertainty and risks. In its spring economic forecast, the European Commission pointed out that it pays close attention to the impact of US macroeconomic policies on the European and global economies; financial measures such as the Federal Reserve’s interest rate hikes and balance sheet reductions will bring significant spillover effects; with the downward pressure on the global economy, these risks will affect the economy. The current short-term recovery momentum has brought shocks.
The Monetary Policy Committee of the Central Bank of India stated on the 7th that it maintains a neutral position on monetary policy and maintains the benchmark repo rate unchanged at 6.25%, while the reverse repo rate remains unchanged at 6%. Although the current slowdown in India's economic growth is serious, considering that the Fed's interest rate hike and balance sheet reduction will put pressure on the rupee ratio and accelerate foreign exchange outflows, the Indian central bank dare not cut interest rates rashly. India’s William O’Neill Research Center Director Sudaka Pantpomen said that India does not have the basis for a rate cut at this stage, and the next rate cut may be decided at the central bank’s monetary meeting in August.
The Nikkei reported that the Fed's interest rate hike, which holds the major currency, the U.S. dollar, will also affect global financial markets. The Fed is gradually accelerating the pace of tightening. Under the circumstances that Japan and Europe continue to promote monetary easing policies, if the United States continues to raise interest rates, funds will return to the dollar, which is expected to yield returns, and global capital flows may be abnormal.
Guo Shengxiang, Dean of the Australian Institute of Financial Innovation, said that the Fed's forecast of interest rate hikes since 2014 seems to have given the world enough preparations. In fact, the previous injection of a large amount of liquidity may still be underestimated. If the Fed is eager to move from raising interest rates to shrinking its balance sheet, the consequence will be drastic fluctuations in the fragile economic recovery of the United States and the world. If it does not cope with it enough, it may lead to repeated monetary policy, which will be harmful to the economic recovery. Guo Shengxiang said that the Bank of Australia and the Australian Financial Prudential Committee have increased preventive measures. As the Australian economy is relatively stable in terms of resource structure, industrial structure, fiscal and taxation and financial policies, and wealth distribution structure, there will indeed be capital outflows and certain fluctuations in the Australian dollar. The Australian economy will not experience a very severe economic and financial crisis, but it may experience a sustained downturn in the medium to long term.