Last week, after adjusting data weights and frequent briefings by senior officials, the Federal Reserve further strengthened its expectation of "continuing to raise interest rates in the short term". This move not only exacerbates market institutions' concerns about the accelerated decline of the US economy, but also may further suppress demand in the context of the continued slowdown in global trade growth.
On February 14th, data from the US Department of Labor showed that the US Consumer Price Index (CPI) rose by 0.5% month on month and 6.4% year-on-year in January this year, both indicators exceeding expectations, with the month on month increase reaching a three-month high. On February 16th, the Producer Price Index (PPI) for January, released by the United States, increased by 0.7% compared to the previous month, higher than the market expectation of 0.4%, and the largest monthly increase since June last year. Analysis suggests that these two indicators, combined with previously unexpected employment data, have forced market institutions to revise their views and instead believe that "the Fed's interest rate hike is taking longer than previously expected".
The Federal Reserve is pleased to see this expected shift in market institutions. Shortly after the release of the data, Loretta Mester, President of the Cleveland Federal Reserve Bank, and James Bullard, President of the St. Louis Federal Reserve Bank, took advantage of the situation and publicly called for further interest rate hikes to ensure the downward trend of inflation rate. At present, most officials of the Federal Reserve believe that inflation data has slowed down, but the inflation level is still too high. Therefore, even facing the risk of economic recession, the Federal Reserve has frequently expressed support for further tightening of monetary policy in recent times.
However, some viewpoints point out that the inflation and employment data on which the Federal Reserve relies to strengthen its expectation of interest rate hikes are subject to modification and distortion, and the difficulty of monetary policy regulation is increasing rather than diminishing.
From the inflation data, the US Department of Labor has released updated CPI expenditure weights, with an increase in the weight of housing items and a decrease in the weight of transportation and food items. The frequency of weight updates has also changed from once every two years to once a year starting this year. Analysis has pointed out that last year, housing rents in the United States continued to rise. Although there has been a recent decline, the overall level still shows significant growth compared to the same period last year. Therefore, the increase in the weight of housing has become the direct reason for the rise in inflation data in January.
According to employment data, the United States added 517000 non farm workers in January, nearly three times the market expectation of 187000. The Federal Reserve believes that the strong demand in the US labor market poses an upward risk to employee salary levels and service prices, leading to persistent inflationary pressures in the US and the need for further interest rate hikes. However, some analyses suggest that there is a significant gap between the labor force participation rate in the United States and pre pandemic levels, with many new part-time jobs and a decrease in full-time jobs, and a continuous decline in labor demand. Current employment indicators cannot accurately reflect the reality of the US labor market.
The Federal Reserve hopes to convince the market that it may need to continue raising interest rates to the previously expected level of 5% or even higher until there are convincing signs of a decline in inflation. However, it is indeed quite difficult to reduce inflation through interest rate hikes, maintain the unemployment rate from being too high, and ensure that the economy does not tighten excessively and fall into recession.
The external impact of continuous interest rate hikes needs to be more vigilant. During the Davos Forum in January this year, the Director General of the World Trade Organization (WTO), Ivica, called for attention to the uncertainty factors affecting trade, with interest rate trends being one of the important ones. Due to the fact that the Federal Reserve's interest rate hikes are aimed at reducing inflation by suppressing demand, continuous interest rate hikes not only increase the risk of economic recession in the United States, but also inevitably suppress demand growth and have negative spillover effects on global trade. At a time when the global economy is showing signs of recovery and exports are playing a supporting role in the economy, the United States unexpectedly took the risk of economic recession to adjust inflation data and strengthen expectations of interest rate hikes. The impact of this cannot be ignored.
