Oct 25, 2021
The U.S. economy presents an unpredictable picture: when prices are soaring and products are in short supply, the number of jobs is almost the highest, but actual recruitment has dropped sharply, which have caused the U.S. economic recovery to be unexpectedly turbulent. In fact, a new wave of epidemics caused by the delta variant reached its peak in September. Although it wasmitigated later, the combination of supply chain crises, energy crises, and high inflation caused the concerns that the U.S. economy would fall into “stagflation” have risen sharply.
Many people who work on Wall Street pointed out that the current high inflation and weak employment do not necessarily mean stagflation. After all, the central bank has learned the lessons of the past. Different from the “stagflation” in the 1970s, some of the current risks of stagflation have been priced by the market.
The inflation rate in the United States has remained at a high level of over 5% for four consecutive months from May to August this year. Similarly, inflation in Europe has also created a new high in more than a decade. The latest World Economic Outlookpublished by the International Monetary Fund (IMF) raised the global inflation forecast for 2021 from 2.4% to 2.8%, and dedicated a chapter to warn about inflation trends, believing that once inflation continues rising, policymakers need to act decisively.
At the end of September, global monetary policymakers such as the Chairman of the Federal Reserve and the President of the European Central Bank expressed that the “transitory” high inflation is now likely to last longer. In a speech at an online event in mid-October, the chairman of the Federal Reserve Bank of Atlanta said that the Fed has set up a “swear jar”, and anyone has to put a dollar in every time he uses the dreaded word “transitory”. Then he said seriously that h the Atlanta Fed and himself believe that it is better to use the term “episodic” to describe today’s inflation rather than “transitory”.
US non-agricultural employment unexpectedly weakened in September, with an addition of only 194,000 people, which was significantly lower than the 500,000 people expected by the market. After the data was released, the market was betting on the weakening of the US economy and loose monetary policy in the short term, but this sentiment quickly dissipated within one hour. The 10-year US Treasury yield fell to around 1.56% in the short-term, then rebounded strongly and broke 1.6%, and closed at 1.618% on the day. The US dollar index plunged below 94 in the short term, then rose to above 94, and closed at 94.1 on the day. U.S. stocks that opened after trading experienced volatility and closed down slightly.
Many Fed officials believe that despite the weak employment data in September and only 194,000 new jobs in the United States, the labor market is expected to continue to recover with the epidemic recently mitigated and maintaining strong demand. Therefore, the sooner the Fed scales back its debt purchases, the situation would be better.
On October 13, local time, the Fed published the minutes of the September Federal Open Market Committee (FOMC) meeting, further stabilizing the Fed’s expectation that it will reveal a “gradual cut in bond-buying” in three weeks. The minutes indicate that the Fed may begin to reduce monthly asset purchases as early as mid-November. Some participants also raised the possibility of increasing the target range of interest rates before the end of next year.
On September 22, the chairman of the Fed stated at a press conference after the interest rate decision that bond reduction may end before the middle of next year. The minutes of the September meeting showed that the decision was made because the Fed members believed the Fed was close to the target of the US economy. The Fed would slowly reduce its monthly bond purchases by $120 billion or reduce its monthly purchases of US Treasury bonds by $10 billion plus mortgage-backed securities purchases by $5 billion.
It also showed that inflation was rising at the fastest rate in years, well above the Fed’s 2% target. Some officials said that supply bottlenecks and production problems had caused inflationary pressures to last longer than expected.
When discussing the uncertainties and risks associated with the economic outlook, attendants pointed out that uncertainty still remained high. Most participants believe that inflation risks were on the upside because they worried that supply disruptions and labor shortages might last longer and have a greater or more lasting impact on prices and salary assets than expected.
In terms of employment, many participants pointed out that although the recent economic recovery had slowed down and employment growth in August was lower than expected, the labor market hadcontinued to show improvement since the meeting at the end of July. Some participants assessed that although the standard for maximizing employment had not been met, if the economy generally developed as expected, it might be met soon. It is labor supply constraints that are the main obstacle to further improving the job market instead of insufficient demand. Continued loose monetary policy would not solve the employment problem. There is no evidence that strong wage growth has caused upward pressure on prices to a large extent, but this possibility deserves close attention.
Although the September meeting did not make a resolution on bondreduction, the minutes showed that the views generallydemonstrated that if the economic recovery was still on the right track, it might be appropriate to end the gradual bond reduction around the middle of 2022. If there is any concreteaction at the meeting in early November this year, the Fed may start to reduce monthly asset purchases in mid-November or mid-December.
During this meeting, Fed officials discussed the specific path to the reduction, which means decreasing the monthly asset purchases. Among them, the purchase of U.S. bonds was reduced by 10 billion U.S. dollars and mortgage-backed securities by 5 billion U.S. dollars. Individual officials also said that they tended to cut the bond-buying to a greater extent.
Participants reiterated that the committee’s criteria for “substantial further progress” on asset purchases were different from those given in the forward guidance on the federal funds rate, and that changes in asset purchase policy were not a direct signal of interest rate policy. Attendantsraised the possibility of increasing the target range of interest rates before the end of next year. Many emphasized that economic conditions might keep interest rates low in the next few years. Correspondingly, some believed that it was more likely to increase the target range of interest rates before the end of next year, and that the inflation in 2022 might continue maintaining at a high level with a risk of rising remorselessly.
In the statement after the meeting, the participants agreed to change the expression on inflation from “risen” to “elevated”. If employment and inflation levels continue moving toward expectations, slowing down the asset purchases will soon be authorized. The committee members believe that the newly added statement is appropriate. In the near future, the committee is very likely to measure whether the standard for cutting bond purchases has been met. Informing the public in advance may reduce the risk that the market reacts adversely to the slowdown in asset purchases.
At the recently concluded International Finance Association (IIF) annual meeting, the vice-chairman of the Fed stated that he believes the standard of “substantial further progress” has long been achieved in terms of inflation and “hasalmost achieved” in terms of employment. He is optimistic about the prospects of the U.S. economy.
In an interview with US media on the 12th, the chairman of the St. Louis Fed said that the Fed should not only start the reduction in November, but also accelerate and finish the process preferably in the first quarter of next year. In this way, once the future inflation requires an early interest rate hike, the Fed will have plenty of room.
Rising prices of transportation, automobile, residential, and energy have significantly contributed to inflation in the United States this year. Inflation has now clearly exceeded substantive progress. Economists said that the most terrible word in the market today is “inflation”. Worries about inflation have also been one of the main factors behind the recent lingering and decline of the US stock market.
According to data released by the US Department of Labor on October 13, the US September CPI increased by 5.4% year-on-year, exceeding market expectations and the year-on-year growth rate exceeded 5% for the fifth consecutive month. This figure is the same as that in June and July when the economy restarted and slightly higher than that in August. The core CPI in September rose 4% year-on-year, the same as thatin August. The CPI measures the changes in the price of goods and services purchased by consumers and the core CPI does not include the price of food and energy, which are fluctuant comparatively.
It shows that the rise in food, gasoline and rents promoted the continued high CPI in September. Some analysts pointed out that rising prices and flowingliving costs all indicate that the elevated inflation in the U.S. is likely to continue until next year. After adjustment for seasonal factors, the CPI increased by 0.4% month-on-month in September and 0.3% in August.
The Social Security Administration said on the 13th that rising inflation will cause the elderly and other Americans to receive a 5.9% increase in social security benefits, the largest increase in nearly 40 years. Higher inflation will also increase social security taxes for well-paid employees. Last week, the U.S. Department of Labor said that the wages offered by employers in September increased by 4.6% year-on-year, which is a rebound from previous months.
The supply bottleneck and gap between supply and demand caused by the epidemic are the root causes of this round of inflation. The Fed once believed that rising prices and shortages of goods were short-term problems, which would disappear with the clearing of transportation channels. In fact, due to the rapidly increasing demand for commodities and goods, there is a serious backlog in major ports and terminals around the world. The cost of shipping has soared, and the prices of commodities and raw materials have been rising. Inflation has severely restricted the economic recovery, and the continuing chaos in the global supply chain has been going on for a long time.
The crisis caused by the chaotic supply chain is prompting the public sector to take more action. Governments all over the world are intervening. The Thai Ministry of Transport plans to open a national shipping line next year to reduce dependence on foreign ships and promote imports and exports. The Biden government issued an executive order in February to promote “resilient, diverse, and secure supply chains to ensure our economic prosperity and national security.”
In order to alleviate the serious backlog of port cargo and inefficiency that restrict economic recovery, the Biden government of the United States is negotiating with the Port of Los Angeles and related companies. An emergency measure “90-day sprint” is planned to launch on October 13, calling for some operations at the Port of Los Angeles to operate 24 hours a day to solve the problem of cargo backlog as soon as possible. The Port of Long Beach in California has implemented this plan first. The cargo throughput of the above two ports accounts for 40% of the total in the U.S.
Prior to this, the Biden administration has received promises from Wal-Mart, FedEx, UPS International Express and other major American companies to extend working hours and provide 24/7 service.
In addition to the inflation that can be reflected in statistical data, “shadow inflation” has recently emerged in countries such as the United States. Although the prices of some goods or services have not risen, their quality has declined.
Since September, the prices of natural gas, thermal coal, crude oil and other energy products in Europe and America have risen to historical highs. This “extremely rapid” hike has been cultivating the energy crisis. As of October 8, IPE natural gas and thermal coal prices have risen to historical highs of 213 pence/thermand 230 US dollars/ton, increasing by 445% and 299% respectively over the same period in 2020. The prices of Brent and WTI crude oil both liftedrapidly to historical highs of 82.4 and 79.4 US dollars/barrel, up 92.6% and 90.1% respectively from a year ago. Due to the high integration of the global industrial chain, the European and American energy crisis has accelerated its spread to the world through channels such as rising energy product prices.
IHS Markit, a research institution, believes that the energy crisis will not be alleviated in the short term. As winter approaches, global energy demand will be even higher, and the energy crisis may further affect people’s livelihood. According to the Energy Information Administration (EIA), American consumers now pay $3.29 per gallon for vehicles on average, the highest level in seven years. The increase in corporate energy expenditure may boostthe pressure on companies to raise prices.
The continuously rising inflation in the U.S. is affecting the Fed’s decision-making and is beginning to have a broader impact on the overall cost of living, wages and social welfare programs. Moreover, economists currently predict that inflation will keep rising.
On the 12th, the Federal Reserve Bank of New York issued a report stating that American consumers’median expected inflation rate in the next year has reached 5.3%, achieving 11 consecutive months of growth and setting a record high. The chief international economist of ING said that rising housing costs, low inventories and increasing energy prices will keep inflation at a relatively high level for a longer period of time. He predicts that by the first quarter of 2022,the consumer inflation index will remain above 5%. He added that inflation may prompt the Fed to act “earlier and faster” to adjust monetary policy against inflation.
A few days ago, the former U.S. Treasury Secretary said that since the current inflation is far above 2%, the Fed’s target, and the central bank has not talked about raising interest rates for a year and a half without taking any measure at the same time, the inflation problem is likely to get out of control and difficult to solve.
He said that the fiscal stimulus plan implemented by the United States has brought a budget deficit of 15% of GDP for an economy with a GDP gap of 2% or 3%, so price increases are not so surprising. But when there are zero interest rates, a large-scale quantitative easing program, and a savings surplus of $2 trillion, inflation is magnified. A record labor shortage in the United States, housing inflation as high as 20%, oil and gasoline prices at their highest levels in eight years, and the government’s ongoing fiscal stimulus plan will all lead to high inflation at a cost. Under these circumstances, the Fed continues to carry out large-scale monetary expansion through the purchase of bonds, whichis irrational and takes great risks.
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