The reasons why the Fed insists on not cutting interest rates:
Controlling inflation: As you mentioned, since 2008, especially the large-scale quantitative easing (QE) policy after 2020, a large amount of liquidity has been released, leading to rising inflationary pressure. The Federal Reserve believes that by maintaining high interest rates, inflation can be further curbed and price stability can be ensured. Although raising interest rates cannot completely eliminate liquidity, it helps to reduce the money supply in the market, thereby alleviating inflationary pressure.
Stabilize market expectations: Market participants are highly sensitive to the Fed's monetary policy. If the Fed cuts interest rates too early, it may trigger market concerns about future inflation and economic prospects, leading to financial market volatility. Therefore, maintaining high interest rates helps stabilize market expectations and reduce uncertainty.
Preventing economic overheating: In the context of strong economic growth and a tight job market, interest rate cuts may further stimulate economic activity, leading to economic overheating and asset bubbles. The Fed hopes to balance the relationship between economic growth and inflation by maintaining high interest rates to prevent unsustainable overheating of the economy.
Global financial market stability: The Fed's monetary policy has a significant impact on global financial markets. Interest rate cuts may lead to a chain reaction of dollar depreciation, capital outflows, and emerging market currency depreciation, which will have an impact on global economic and financial stability. Therefore, the Fed needs to take global factors into consideration when formulating monetary policy.
Factors that can really determine whether the Fed will cut interest rates:
Inflation data: As mentioned earlier, inflation data is a key factor in determining whether the Fed will cut interest rates. If inflation continues to be below the Fed's target level and economic growth and the job market remain stable, the possibility of a rate cut will increase.
Economic Growth and the Job Market: While the Fed considers economic growth and the job market when evaluating rate cuts, it is more focused on the balance between those indicators and inflation. If slowing economic growth or a tight job market weighs on inflation, the Fed may be more cautious about cutting rates.
Global economic and financial conditions: Global economic and financial conditions are also important factors affecting the Fed's decision to cut interest rates. If global economic growth slows or financial markets become turbulent, the Fed may delay cutting interest rates to support global economic and financial stability.
Effective ways to curb inflation:
The two methods you mentioned to curb inflation - driving up the price of US dollar assets and triggering a deep economic recession - both have great risks and side effects. In contrast, the Fed prefers to gradually control inflation through monetary policy tools such as raising interest rates and shrinking the balance sheet. At the same time, the Fed will also consider other policy tools, such as fiscal policy and regulatory policy, to form a policy synergy to jointly respond to the challenge of inflation.
In short, the Fed's insistence on not cutting interest rates is based on a comprehensive consideration of maintaining domestic economic stability, controlling inflation, and taking into account the complexity of the global economy and financial markets. In the future, the Fed's monetary policy will continue to be flexibly adjusted based on economic data and market conditions.
