The Fed’s policy goal in rate is to stabilize the U.S. economy, but its impact is global.
On June 16, the U.S. Federal Reserve announced that it would raise the target range for the federal funds rate by 75 basis points to between 1.5% and 1.75%. This is the first time the Fed has raised interest rates by 75 basis points since 1994, and it is also the largest rate hike.
After this rate hike is implemented, the market expects the Fed to raise interest rates more aggressively, just as Fed Chairman Paul Volcker, who took office in 1979, raised interest rates beyond expectations to curb high inflation. The U.S. federal funds rate once reached 19.1% that year, and the “Volcker moment” had a huge impact on the world economy, and Latin American countries fell into a debt quagmire.
Now, is the Fed entering a “Volcker moment” again? The process of the Fed raising interest rates and shrinking its balance sheet is accelerating, and earthquakes will inevitably occur in the global currency market.
The Fed said in its statement that it attaches great importance to inflation risks and seeks to achieve the goal of full employment and a longer-term inflation rate of 2%, while emphasizing the Fed’s firm commitment to bringing inflation back to 2%. In other words, the Fed made bringing inflation back to 2% as its primary goal. This means that the Federal Reserve has changed its monetary policy since the outbreak of the new crown epidemic, while also realizing that the US economy may enter a quagmire of stagflation.
At present, it seems that the US economic growth rate is slowing down, the inflation rate is rising, and wage prices are rising. In addition, the previous two interest rate hikes have not eased inflation, but have intensified it. Fed Chairman Jerome Powell said inflation has affected public attitudes, making the Fed’s job more difficult. Between the goals of economic growth, inflation, and full employment, the Fed needs to choose. After raising interest rates and shrinking the balance sheet, monetary tightening will inevitably have an impact on economic growth and employment. But without extraordinary measures, the stagflation of the 1970s could reappear.
The Federal Reserve is the central bank of the United States, but the U.S. dollar is a global currency and the center of the global monetary and financial market. The Fed’s policy goal is to stabilize the U.S. economy, but its impact is global.
First of all, the unconventional rate hike by the Federal Reserve means the end of the monetary easing cycle. After the 2008 financial crisis and the 2020 COVID-19 crisis, the Federal Reserve opened the floodgates for monetary easing, even unlimited quantitative easing.
Second, a substantial rate hike by the Federal Reserve will affect capital flows. The return of capital from emerging markets to the United States will inevitably have a relatively severe impact on emerging market economies. In 2013, the Federal Reserve began to withdraw from the quantitative easing policy, capital flight from emerging economies, currency depreciation, and debt pressure increased sharply. Obviously, the Fed’s rate hike and balance sheet reduction this time will be stronger than in 2013, and the impact and impact will be even more severe.
Finally, in the era of monetary tightening, the driving force of economic growth depends more on the increase in total factor growth rate, which is a very big test for the quality and quality of the economies of all countries in the world.
In short, the causes of inflation are complex, and monetary policy alone is not necessarily effective.