From the perspective of employment and economy, the Fed’s rate cut has failed, which means that the Fed is not considering employment or recession. The employment data is made up every month, and the whole world knows it except for a small number of people. The recession is mainly based on their official announcement, with a lag period of 11 to 13 months.
Then we need to find the answer from a deeper level. What is the purpose of the Fed to keep interest rates high? What are the factors that can really determine whether the Fed will cut interest rates?
Since 2008, the United States has started a debt-driven economic growth model. Periodic economic crises are inevitable, especially since 2020, when the super-large-scale QE has been printing money without a bottom line, releasing a huge amount of liquidity that exceeds market needs. This is the root cause of inflation. Can the Fed really curb inflation by raising interest rates and shrinking its balance sheet? Obviously not. On the surface, this round of interest rate hikes has suppressed US inflation from nearly double digits to below 3%, which seems to be close to success.
However, raising interest rates has not eliminated liquidity. On the contrary, high interest rates have generated a large amount of capital gains. If these extra gains are released into the market, one can imagine the consequences. If the excess money is not evaporated, inflation cannot go down.
The inversion of long-term and short-term bond yields caused by interest rate hikes, especially short-term bonds, what does a risk-free return of more than 5% mean? Just put your money in the bank, or buy 3-month short-term US bonds, and you can get a risk-free 5% return? What other investment activities can achieve this? Not only Americans, but also people around the world who hold US dollars, as long as they are not fools, know to buy US bonds. The interest rate hike suppresses the global supply side, driving capital to the equity market, rather than production activities.
But the U.S. is benefiting from the consumption driven by high risk-free returns. All those holding U.S. dollars have enjoyed a 5% risk-free return. In this case, the downward trend in inflation is temporary. Once the Fed starts to cut interest rates, inflation will come back and will be more fierce than in 2020. Combined with the inventory cycles in the United States, China and the world, you can imagine what this means for commodities?
The most effective way to curb inflation is to evaporate excess money. There are only two ways:
1. Drive up the price of US dollar assets, absorb excess liquidity, and let the money of these buyers evaporate quickly as the assets fall.
Second, there will be a deep economic recession and a repricing of labor and means of production prices.