The Fed's determination has been made, and gold and bitcoin can "wash and sleep"

Time:2022-01-14 Source: 819 views Trending Copy share

Facing the highest level of inflation in 40 years and unemployment near a 50-year low, the Fed, led by Powell, is no longer sticking to super-easy policy, plans to end net asset purchases in March, and even raise interest rates at the same time, and later this year Start abbreviation.

The bottom line for the Fed is that policy adjustments do not trigger a U.S. recession. US financial markets can tolerate short-term price corrections, while emerging market countries must fasten their "seat belts".

Powell said at a hearing on Tuesday of the U.S. Senate Banking Committee on re-election as Fed chair that the Fed is ready to move quickly if the recovery goes as expected. Ending net asset purchases in March, raising interest rates during the year, and starting to shrink the balance sheet later this year.

Powell's resolute statement is due to the "rising" inflation level in the United States.

According to data from the U.S. Department of Labor, the consumer price index (CPI) in December 2021 rose by 7% year-on-year, an increase of 6.8% in November, the fastest growth rate since 1982, and the third consecutive month that the inflation rate exceeded 6%. The core consumer price index, which strips out the volatile food and energy categories, rose 5.5% in December from a year earlier, up from 4.9% in November and the highest level since 1991. The latest survey of consumer expectations by the New York Fed shows that respondents expect inflation to be 6% in one year and 4% in three years, which is quite high relative to the Fed's 2% target. The jobs report showed the U.S. unemployment rate fell to 3.9 percent in December, near a 50-year low, and average hourly earnings rose 4.7 percent.

The Fed doesn't want to see rising wages push prices higher. Simply put, inflation is higher than expected, the job market is very strong, and the result of this situation must be tightening monetary policy. Powell said frankly that the focus on inflation and price stability is "a little bit more" than the Fed's goal of maximizing employment. He emphasized that the Fed has the determination to take necessary measures to control price increases, and will use tools to bring inflation back to target to prevent high inflation from becoming entrenched.

Another important reason for Powell's determination to initiate austerity comes from the deepening supply chain crisis in the United States.

Unable or unwilling to spend money on services such as international travel in the wake of the COVID-19 pandemic, Americans have turned to buying more goods, resulting in supply problems for big-ticket items such as cars and appliances. At present, the Christmas traffic peak has ended, but the congestion of container ships is still intensifying, and the stockpiles at the ports are constantly accumulating, which means that the supply chain problems have not been alleviated. There are now about 150 ships waiting to be berthed along the three major U.S. coastlines. There is a large gap in the demand for dock workers and drivers. The Fed cannot solve the supply chain crisis brought about by the epidemic, so it has to increase the price of funds to curb demand. This kind of thinking mode is really a very standard "If you can't solve the problem, you can solve the problem."

Powell's third-level consideration for accelerating the pace of tightening is that if high inflation is too persistent, it will lead to even tighter monetary policy, which could trigger a recession and be detrimental to the job market. Therefore, Powell also mentioned that after raising interest rates and shrinking the balance sheet, U.S. monetary policy will remain moderately loose to prevent excessive tightening that leads to economic recession. This timely statement not only satisfied the demands of the lawmakers, but also won the favor of Wall Street. No wonder the U.S. stock market rose rapidly after Powell's remarks.

Powell did not clearly state the time of the first rate hike, but in just one week, four local Fed chairmen have expressed support for raising interest rates in March, and Wall Street giants such as JPMorgan Chase, Deutsche Bank, and Citigroup have also expected to raise interest rates in March. The swap market is pricing in an 80% chance of a rate hike by the Fed in March.

It must be clear that, despite the Fed's increasingly skilled ability to control monetary policy, Powell can not guarantee that the proportions will be just right.

The World Economic Forum's annual risk report showed a marked increase in pessimism about the global outlook. Over the next five years, the main economic risks are the bursting of asset bubbles and debt crises. As tightening policy pushes up real interest rates, putting enormous pressure on highly indebted companies, the sustainability of their debt burdens will be questioned, triggering a sell-off. In the four trading days at the beginning of the year, the real interest rate on 10-year U.S. Treasuries climbed by more than 30 basis points to -0.78%, the highest level since June 2021.

This is not a good sign. However, the Fed is not shy about quickly revising the valuation of US stocks in a slump, and "washing may be healthier." However, with the tightening of the Fed's monetary policy, the currencies of emerging market countries will inevitably depreciate, and the stock and bond markets will definitely start to be turbulent. Political turmoil may also occur in some hard-to-return countries. As for gold and bitcoin, which have been enjoying great popularity in the past two years, it can really come to an end.

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