The most radical in forty years! The Federal Reserve raised interest rates by 50 basis points to close 2022.
[Global Times reporter Ni Hao] In the early morning of December 15, Beijing time, the Federal Reserve decided to raise interest rates by 50 basis points for the last time in the year, ending the most radical interest rate hike year since 1982. The decision to raise interest rates at the end of this year is the first time that the Federal Reserve has slowed down the rate hike since it started the current rate hike cycle in March this year. After the Federal Reserve announced its interest rate decision, the central banks of the euro zone, Britain and Switzerland also raised interest rates by 0.5 percentage points.
Since March, the Federal Reserve raised interest rates seven times in 2022, with a cumulative increase of 425 basis points, and finally raised the target range of the federal funds interest rate to 4.25%-4.50%, reaching the highest level since the international financial crisis in 2008. In March and May this year, the Federal Reserve raised interest rates by 25 basis points and 50 basis points respectively. After the inflation level in the United States reached its peak in June, the Federal Reserve raised interest rates by 75 basis points for four consecutive times in June, July, September and November, the first time in 40 years. As the inflation level in the United States peaked, the Federal Reserve slowed down the rate hike at its last interest rate meeting in December.
It is the highest inflation level in the United States in 40 years that stimulates the Fed to raise interest rates drastically. According to the data of the US Department of Labor, in recent years, the inflation level in the United States has gradually increased. In November 2021, the CPI data rose to 6.2%, and then maintained a rapid upward trend, and finally reached the highest point of this round of inflation cycle of 9.1% in June 2022. After June, the inflation level in the United States began to fall gradually, but at present, the CPI in the United States remains at a historical high of nearly 8%, which is far from the ultimate goal of the Federal Reserve of 2%.
After the meeting, the Federal Reserve issued a statement saying that in order to achieve the goal of pushing the inflation rate back to 2%, the Federal Reserve believed that it would be appropriate to keep raising interest rates. At the press conference after the interest rate meeting, Federal Reserve Chairman Powell was open to the possibility of raising interest rates at the meeting on February 1 next year, and said that raising interest rates would not cause the US economy to fall into recession, and the Fed should not consider lowering interest rates until it was convinced that the inflation rate would continue to drop to 2%. In the latest forecast, the Federal Reserve expects to raise the federal benchmark interest rate to around 5.1% by the end of next year, which is higher than the expectation of around 4.6% in September. This has disappointed those who have been hoping that the Fed may end raising interest rates in a relatively short time.
Wu Chaoming, vice president of Caixin Research Institute, said in an interview with Global Times that the Fed is expected to raise interest rates further next year, raising the benchmark interest rate to over 5%, and the high interest rate level will be maintained until the end of the year. However, Wu Chaoming believes that the cumulative effect of a sharp interest rate hike will also increase the risk of an unexpected slowdown in the US economy, and the decline in inflation will be at the expense of economic contraction or even recession.
The US CNBC website said in the report that the Federal Reserve lowered its economic growth target for 2023, and it is estimated that GDP will only increase by 0.5%, barely higher than the level considered as economic recession. In its December economic forecast, the Federal Reserve also sharply lowered the real GDP growth rate in 2024, and the forecast value was lowered from 1.7% in September to 1.6%.
"The narrowing of the Fed’s interest rate hike brings hope to emerging markets." The British "Financial Times" said on the 15th that analysts said that the fall in inflation and the narrowing of interest rate hikes in the United States and other developed economies have brought hope for a rebound in emerging markets. This year, developing countries have suffered multiple adverse effects: rising interest rates, a stronger dollar, soaring food and fuel prices, and other chaos caused by the COVID-19 epidemic and the Russian-Ukrainian conflict. Analysts say that as some of these conditions begin to ease, the prospects for economic growth should improve.
According to the data released by the International Finance Association (IIF), the global capital inflow to emerging market countries in November was 37.4 billion US dollars, the largest since June 2021. Among them, in November, the fixed income assets of emerging market countries flowed into US$ 14.4 billion, the largest monthly capital inflow since this year.
However, Wu Chaoming said that the debt risks accumulated by emerging markets and developing economies are still very high, and the spillover effect caused by the Fed’s interest rate hike will lead to the depreciation of non-US currencies and the return of capital to the United States, and the debts of emerging markets and developing economies still have the risk of evolving into a new round of crisis. Wu Chaoming predicted that under the influence of the Fed’s higher and longer interest rate hike cycle, the global financial market turmoil may continue.
Zhang Ming, deputy director of the Institute of Finance, China Academy of Social Sciences, recently predicted that the Fed will raise interest rates three or four times in the future, and the US dollar index will still consolidate at a high level in both directions. Until the second half of 2023, the US dollar index is expected to drop significantly. Fei Xiaoping, an analyst at Dongguan Securities, believes that considering that China’s current prices are stable and controllable, the Fed’s interest rate hike has little impact on domestic monetary policy. Under the background of steady growth, China’s monetary policy will continue to be stable and loose, promoting macroeconomic stability and progress. With the fall of American prices and the Fed’s slowing interest rate hike, the impact of the strong dollar cycle on the RMB exchange rate is expected to gradually weaken.
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