The Fed will choose not to land

Let the bullet fly for a while

It is generally believed that inflation data is the key factor in determining whether to cut interest rates or not. However, the real situation is not so simple. Inflation in the United States is not completely equivalent to economic overheating. It is just a digital manifestation of many economic indicators.

Generally speaking, economic overheating will lead to inflation, which will then need to be controlled by raising interest rates. But the root cause of the US dollar rate hike this time is the over-issuance of currency. This seemingly overheated economy masks the real weakness of the economy.

The Fed has adopted a large-scale quantitative easing policy, and its purpose is self-evident, aiming to save the economic order on the verge of collapse as soon as possible. However, when entering the liquidity recovery stage, the Fed's goals become complicated, both to curb inflation and to promote the economy out of the sluggish growth before the epidemic.

The Fed has repeatedly emphasized that it will only consider cutting interest rates when the inflation rate drops to between 2% and 3%. At present, the inflation rate has not yet reached 3%, so the interest rate cut needs to wait. At the same time, we should also consider that it will take at least 3 months for the effect of monetary policy to appear. Therefore, unless the CPI drops rapidly to 2.5% year-on-year, or there is sufficient evidence that the inflation rate will steadily drop to around 2.3%, a rate cut may be a long way off.

Despite the continued rate hike, the US economic growth remains solid. On July 25, the US Department of Commerce announced the initial GDP growth rate in the second quarter. The seasonally adjusted annualized initial GDP grew by 2.8% month-on-month, exceeding the previous value of 1.4% and the market expectation of 2%. In the view of the Federal Reserve, even if the interest rate has exceeded 5%, the economic growth rate remains strong, so there is no need to rush to cut interest rates.

What the Federal Reserve needs to be prepared for is that once the economic situation deteriorates, it should quickly start to cut interest rates to produce results. If the situation is not serious enough to require action, making a hasty decision may not be worth the loss.

With the release of the US unemployment rate data in early July, discussions about the US recession are increasing. This concern stems from the Sam's Rule proposed by former Federal Reserve economist Claudia Sam in 2019. Its core idea is that when the difference between the three-month moving average of the US unemployment rate and the low point of the previous year exceeds 0.5%, it indicates that the United States may have entered the early stages of an economic recession.