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Trump Again Urged Powell That The Market Expected The Federal Reserve To Remain Unpaid.
- Dec 14, 2018 -

Following the European Central Bank, the Federal Reserve will hold its December interest rate meeting next week. Trump, who has recently spared no effort to criticize the Federal Reserve's monetary policy, changed his strategy in an interview this week and again persuaded the Federal Reserve to postpone its December interest rate hike by adopting a flexible offensive.

Trump said Powell was "a good man" and he was "trying to do what he thought was the best thing". Not long ago, the President of the United States hinted that he regretted nominating Powell to succeed Yellen. Although the attitude was mild, Trump reiterated that in the current external environment, Powell needed to "adapt" the Fed's monetary policy to the reality.

Potential risks to the U.S. economy

To be honest, outside concerns about the Fed's interest rate hike are not unfounded.

On Wednesday (12) November inflation data released by the U.S. Department of Labor showed that CPI in November increased by 2.2% year-on-year, in line with expectations, with a previous value of 2.5%. In November, the CPI of the United States was 0%, with a previous value of 0.3%. This shows that CPI growth slowed down to its lowest level since January 2018, following the sharp decline in U.S. PPI data released on November 11.

Former Federal Reserve Chairman Janet Yellen also said in a discussion at CUNY on Monday night that she feared another financial crisis might occur in the future. She said there were huge loopholes in the system. Regulators can only solve such problems for individual banks, but not for the entire financial system. At the same time, the United States does not have many tools to deal with emerging problems. Yellen also warned that corporate debt is now quite high.

"This is a risk. If there are other factors contributing to the recession, high levels of corporate leverage may prolong the recession and lead to a large number of bankruptcies of non-financial enterprises. "If interest rates continue to climb and borrowing costs rise, then such a huge expenditure could become a financial problem," Yellen said. Some market participants are also concerned that companies on the edge of investment grade will lose their existing ratings and become high-yielding or junk bonds. This could further lead to a sharp rise in interest rates. Overall, however, I think interest rates are likely to remain at a lower level than they have been for decades.

Jeffrey Gundlach, chief executive of DubleLine Captial, known as the "new debt king", also said Tuesday that the Fed's large-scale balance sheet reduction was one of the catalysts for stock market sell-offs. In terms of interest rates, even if the economy is weak, interest rates may continue to rise as the U.S. government tries to fund its growing deficit. But that is to say, the Federal Reserve has launched a "suicide model" in which government deficits continue to rise as a share of GDP, while still raising interest rates.

Unlike Yellen, Powell focused on market orientation.

Steve Blitz, TS Lombard's chief U.S. economist, said Powell had no reason not to raise interest rates in December, and time would prove that. "Powell is a more market-oriented person than Bernanke and Yellen. He knows more about how markets work." He thought.

In any case, the market still believes in the December rate hike. CME Group's Fed Watch tool shows that, despite Trump's recent efforts to coerce both hard and soft, the market expects the Federal Reserve to raise its benchmark interest rate by 25 basis points and the probability of raising it to 2.25-2.50% remains as high as 78.4%. But compared with the firm rate hike in December, the market has adjusted the Fed's rate hike path for next year.

Wu Jingjing, head of investment strategy at Citibank (China) Limited's retail bank, told First Financial Journalist that Federal Reserve officials, including Powell, have recently shifted their views. Powell said there was no default policy path and current interest rates were only "slightly below" the neutral range. Based on this, Citigroup expects the Federal Reserve to raise interest rates once in December and twice next year, and the final policy interest rate range may be 2.75% to 3%. Investors are advised to reduce the maturity of bond portfolio.

Jan Hatzius, a Goldman Sachs economist who had expected the Fed to raise interest rates four times next year, said in a recent study that the Fed had a 90% chance of raising interest rates in December, but the probability of raising interest rates in March next year had dropped to less than 50%. This, he said, is because recent U.S. economic data has shifted from "exceptionally strong" to "just strong".