The Fed's interest rate policy seems to have lost its effect recently, and the impact of interest rate cuts on employment and economic recession is getting smaller and smaller. This makes us wonder, what is the real purpose of the Fed's high interest rates? What factors influence the Fed's decision to cut interest rates?
Debt-driven economic growth model
Since the 2008 financial crisis, the United States has embarked on a debt-driven economic growth model. Especially since 2020, the Federal Reserve has continuously printed money through a super-large-scale quantitative easing (QE) policy, releasing liquidity far exceeding market demand, which is the root cause of inflation. Although on the surface, this round of interest rate hikes has suppressed US inflation from nearly double digits to below 3%, which seems to have achieved significant results, the interest rate hikes have not eliminated liquidity. On the contrary, high interest rates have generated a large amount of capital gains.
The dangers of high interest rates
What does a 5% risk-free return on short-term Treasury bonds mean? You can get a 5% risk-free return by simply depositing money in a bank or buying a 3-month short-term U.S. Treasury bond. In this case, the attractiveness of investing in production activities has greatly weakened, and global capital has flowed to the equity market rather than production activities. This has led to global supply-side suppression, driving capital flows to the equity market, and further pushing up the price of U.S. dollar assets.
Beneficiaries of high interest rates
Another beneficiary of high interest rates is the consumer side. All those who hold US dollars can enjoy a 5% risk-free return, which means that the downward trend in inflation is only temporary. Once the Fed starts to cut interest rates, inflation will return, possibly more fiercely than in 2020. Combined with the inventory cycle in the United States, China and the world, this means huge demand pressure for commodities.
The real way to curb inflation
To truly curb inflation, the most effective way is to evaporate excess money. Currently, there are two paths:
1. Driving up the price of US dollar assets
By pushing up the prices of US dollar assets, it absorbs excess liquidity in the market and then lets the money of these buyers evaporate as asset prices fall.
2. Deep economic recession
Through a deep economic recession, the prices of labor and means of production will be repriced, thereby eliminating excess liquidity.
in conclusion
On the surface, the Fed's interest rate policy seems to be controlling inflation, but in reality, the high interest rate policy only temporarily suppresses the superficial problem of inflation, but does not solve the fundamental problem. In order to truly control inflation, the Fed needs to take deeper measures, including making excess money disappear, which may be achieved by driving up asset prices and then causing a plunge or a deep economic recession. This process will have a profound impact on the global economy, especially the commodity market.
In short, we need to be alert to the current economic signals and be prepared for possible economic storms in the future. Future market opportunities may lie in these deep-seated economic changes.
