After the Federal Reserve raised interest rates by 75 basis points in June, the dollar's gains continued to narrow, which once caused the yield of 10-year US Treasury bonds to fall to a two-week low, because the market had fully digested the prospect of raising interest rates. The US federal funds futures price shows that the probability of the Fed raising interest rates by 75 basis points at the monetary policy meeting in July is 73%. But as far as September is concerned, the market has fully digested the expectation of raising interest rates by nearly 50 basis points.
Although the dollar has fallen from its high level 20 years ago, its performance so far this year is still far better than that of other major currencies. The cumulative increase this month is nearly 3%, and the cumulative increase this year is over 8%. Although the need for the Federal Reserve to raise interest rates substantially has weakened, the overall interest rate increase still exceeds that of most countries. Last night, Federal Reserve Chairman Paul said that the biggest risk of the US economy is persistently high inflation, rather than that raising interest rates will slow down economic growth.
As the fear of recession intensifies, the market is repricing the interest rate hike targets of major economies. The most obvious is the Bank of England. After it raised its key interest rate by 25 basis points for the fifth time in a row, many economists predicted that it would stop raising interest rates after it rose to 1.5%, but the current interest rate has reached 1.25%.
Moreover, once the world's major economies face the risk of slowdown or even recession, rising borrowing costs will hurt the attractiveness of high-risk assets, and safe-haven funds will once again enter the US dollar. As we have seen in the past, with the tightening of the financial environment, the upward advantage of the US dollar is still obvious.
According to the research data of Standard Chartered Bank, since July last year, the pemberton index has risen sharply, while the Bloomberg Financial Situation Index has also tightened by 2.5 percentage points. If financial condition index changes by 1.2 percentage points, it will reach the lowest level since 1.998, which means that the US dollar will further appreciate by 5%.
The data of capital flow in the United States shows that investors continue to hold US dollars while reducing their risky assets recently, which makes the cash position of foreign investors in US dollars close to a record high, indicating that the US dollar still plays a major role in hedging the global stagflation risk, which helps to cushion the downward pressure brought by the US economic slowdown.
Related Q&A: What does it mean for the US dollar to raise interest rates? 1. USD interest rate hike is the Fed's interest rate hike. The purpose of raising interest rates includes reducing money supply, curbing consumption, curbing inflation, encouraging deposits and slowing down market speculation. The US dollar is the global currency, and most of the global trade and investment fields are denominated in US dollars. 2. Impact of interest rate hike: (1) The fluctuation of deposit interest rate will affect the development, setting and adjustment of bank deposit business varieties. Deposit business is the core business of banks, and its importance to banks is self-evident. At present, most of the capital sources of commercial banks in China are deposits, including savings deposits and corporate deposits. After allowing the deposit interest rate to fall, the bank will further subdivide the customer groups according to the index of capital organization cost, customer capital amount and capital contribution rate, and implement different deposit interest rates. Customers with high deposit amount and strong stability will likely get higher deposit interest rate returns. (2) After the floating space of loan interest rate is completely liberalized, it will be beneficial for banks to manage and use funds according to the laws of market economy, and link the level of loan interest rate with risks, so as to obtain relatively high returns while taking high risks and achieve a balance between risks and returns. It is conducive to the bank's loan support for small and medium-sized enterprises, increasing the confidence of banks in lending to small and medium-sized enterprises, alleviating the financing difficulties of small and medium-sized enterprises and accelerating their development. (3) It will test the bank's fund management and operation ability. In the future, the competition in the banking industry will be "high deposit interest rate and low loan interest rate", and the deposit-loan spread space will be further narrowed. Banks with weak financial strength, poor capital operation ability and low service level will be eliminated. (4) As far as residents' savings are concerned, we need to calculate the transfer carefully, because we are likely to face a new interest rate hike cycle, and it is unwise to turn all savings into medium-and long-term deposits now. Related Q&A: The Federal Reserve raised interest rates by 75 basis points again! What will happen if the dollar hits another record high? In today's global financial integration, the United States is really not the time to take this drastic medicine. It only considers solving its own problems without considering other countries, and the corresponding consequences will gradually emerge.
In June, the Federal Reserve announced that it would raise interest rates for the third time this year, with a range of 75 basis points. What is this concept? Let's just say that this is the biggest rate hike in 28 years since 1994, and the interest rate level has reached the time when the epidemic broke out in March the year before last.
Affected by overseas epidemics, the global economic performance is sluggish. Why did the Fed do the opposite at this time and choose to raise interest rates substantially?
In fact, it is completely out of helplessness. In the early days of the epidemic, in order to promote liquidity and boost the economy and consumption, the Federal Reserve adopted a flood of loose monetary policy, even at the expense of "sending money" to the people.
Flood irrigation has a great impetus to economy and consumption, but at the same time its disadvantages are also obvious. First and foremost, high inflation:
There is more money in the market, and the goods have not increased. On the contrary, they have decreased because of limited production and work, and prices will naturally soar.
For example, in May this year, the inflation rate in the United States reached 8.6%. At the same time of inflation, there is a decline in consumer confidence index. Who wants to pay such a high price? So the consumer confidence index dropped from 58.4 to 50.2.
At present, high inflation is the biggest concern of the Fed, so it began to raise interest rates substantially. It hopes to reduce market funds and control inflation at 2%.
However, raising interest rates has two sides, both advantages and disadvantages. While curbing inflation, market funds will be reduced, and confidence in investment, stock market and lending will be frustrated, leading to a decline in the stock market, an increase in borrowing costs and an increase in commodity costs.
Of course, after raising interest rates, US stocks rose instead, which seems to run counter to the impact of raising interest rates on the stock market, but this is a short-term performance; The rise of the stock market is directly related to market expectations. The market expects to raise interest rates sharply, and it is meaningful to have a remedial rebound in the short term. But in the long run, it is bound to be bad for the stock market.
To sum up, on the one hand, raising interest rates is conducive to curbing inflation, on the other hand, it is not conducive to economic recovery in the United States, and even leads to economic recession. But now the Fed has ignored so much. As the saying goes, the smaller of the two can only curb inflation by raising interest rates. As for the economy? Let's talk about it after curbing inflation.
What is the impact of the Fed's sharp interest rate hike on other countries? Will there be "bad consequences"?
The Fed's interest rate hike affects not only the United States, but also countries around the world. After all, the United States is the largest economy, after all, the dollar is the currency hegemon, after all, the global economy and finance have been integrated, and the nature of the transmission effect goes without saying.
What impact will this have on countries? The first thing to bear the brunt is the return of funds to the US market. Since it is a rate hike, the exchange rate of the US dollar will increase, and the US dollar index will also increase. It is inevitable that global funds will flow to the American market.
The drawback brought by the return of funds to the country is the lack of funds. If there is less market capital, the stock market will not be boosted, the borrowing cost will increase, the operating cost of enterprises will also rise, the investment confidence will be frustrated, and the negative effects brought by the withdrawal of funds are self-evident.
In addition, after the US dollar strengthens, the exchange rates of various currencies against the US dollar will fall, that is, "depreciation", which is a great challenge for countries to "stabilize foreign exchange reserves".
Some people may say, can't we raise interest rates in response to the dollar's interest rate hike?
Indeed, in fact, after the Fed raised interest rates, Australia, the European Central Bank, the United Kingdom and other countries also raised interest rates to cope with the possible withdrawal of funds.
However, following the interest rate hike will also show drawbacks, that is, the consumption we mentioned above will not be boosted, lending will shrink, and production costs will rise, especially for economies such as Europe and the United States that rely heavily on consumption. Once consumption is frustrated, the whole economy will be affected, which is not conducive to economic recovery.
To sum up, the Fed's choice to raise interest rates at this time only takes care of the problem of high domestic inflation, which is actually very unfavorable to the global economic recovery.
However, we need not be too pessimistic. The purpose of the Fed is to keep inflation below 2%. Once this goal is achieved, it is inevitable to cut interest rates later.
In addition, in order to cope with the impact of the Fed's sharp interest rate hike, we should also "move at the right time" to minimize the negative impact:
For example, in order to cope with the monetary tightening, appropriately increasing the issuance of government bonds and corporate bonds can solve this problem, increase infrastructure through bond financing, and alleviate the problem of insufficient market funds and "no funds available".
At present, the challenge is great, especially it is reported that the 75 basis point interest rate hike is not the end. In order to curb inflation, the possibility of continuing to raise interest rates by 50-75 basis points in the future is not ruled out, which will test the ability of policy makers in other countries.
The status of the US dollar determines that raising interest rates now will only harm the interests of other countries, which we all don't want to see, but there is actually no better way:
In order to fundamentally solve the problem, the most important thing is to change the monopoly position of the US dollar and gradually reduce the proportion of the US dollar in global economy and trade. It is best to form a diversified situation of US dollar, RMB, Euro and Japanese yen, but this process is not achieved overnight and has a long way to go.
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