**: China Macroeconomic Forum (CMF).
Wang Jinbin is the executive deputy secretary of the Party Committee of the School of Economics, Chinese University, a researcher at the National Academy of Development and Strategy, and a key member of the China Macroeconomic Forum (CMF).
Against the backdrop of a decline in inflation and unemployment in November, the Fed's monetary policy faces a new dilemma: the Fed needs to have both a "soft landing" and a cooling of the US financial market. The tight labor market and the wealth effect of oversized risk assets constitute the "twin pillars" that support the slow decline in core inflation in the United States, and the inflation control target is far from being achieved. In terms of the choice between the cooling of the labor market and the cooling of the financial market, the Fed may be more inclined to cool the financial market and release the risk of excessive assets.
On December 13, 2023, the Federal Reserve released its latest monetary policy statement, which basically confirmed the current policy rate of 525%-5.50% is the restrictive interest rate level. In the "Economic Summary" released at the same time, the GDP growth rate of the United States this year was revised upward to 26%, cutting the federal interest rate to 540%。The market is already anticipating that the current rate hike cycle should end and start to ** when and how much to cut rates next year.
The US economic CPI in November was 31%, and the core CPI was 4 year-on-year0%, the year-on-year growth rate of CPI slowed down slightly, and the year-on-year growth rate of core CPI was the same as that in October. Meanwhile, the unemployment rate in November unexpectedly fell from 39% down to 37%。In November, the U.S. economy saw a decline in inflation and unemployment, which made the Fed's expectations for a "soft landing" greatly increased, but the U.S. CPI in November still showed a trend of higher energy and service industries, and the stubbornness of the service industry made the decline in core inflation continue to be relatively slow in the early stage, and the decline in the service industry has become a problem that the Fed must face to reduce inflation. If the Fed wants the still-strong labor market to continue to support consumer spending, it will need to be more tolerant of inflation, adopt a time-for-space monetary policy approach, and expect financial markets to cool down and reduce the wealth effect and housing-related services**, especially rents**. If financial markets don't cool down, they need to cool the labor market. In terms of the trade-off between the two market cooling, the Fed may be more inclined to cool the financial markets, otherwise, the decline in core inflation in the United States will be quite slow.
From the perspective of risk assets in the U.S. financial market, as of December 17, the U.S. has been too large this year, with the Dow Jones, Nasdaq and S&P 500 respectively. 54% and 2291%。This is true from both a valuation perspective and a yield perspective. Figure 1 shows the change in the valuations of the three major U.S. stock indexes since 2018. 2020 is a special year for the impact of the epidemic, and we used two sample methods to make a simple comparison. Excluding 2020, the average price-to-earnings (PE) valuation of the S&P 500, Nasdaq, and Dow Jones from 2018 to 2022 is 22., respectively4 times, 314x and 223 times, the valuation in 2023 is higher than the average of the 4-year valuation respectively. 7% and 146%。If we include the special year of 2020, the valuation of the United States** in 2020 is obviously overvalued in the dual context of the Fed's uncapped easing stimulus and economic downturn, with the Nasdaq's P E as high as 666 times, S&P's PE valuation is also as high as 37 times, and the Dow Jones has also reached 302 times. The price-to-earnings (PE) ratios of the Nasdaq and Dow Jones indices in 2023 are 10 percent higher than the average of these 5-year valuations, respectively, compared to the average 2018-2022 valuations including 20200% and 70%, the S&P 500 is 23%。
Figure 1: U.S.** valuation (PE, TTM).
Data**: wind. Data for 2023 is as of December 15.
From the perspective of dividend yield, the dividend yield of the United States** has decreased significantly this year. Figure 2 shows the change in dividend yields of the three major U.S. stock indexes since 2018. Similar to Figure 1, the S&P 500, Nasdaq, and Dow Jones indices in 2023 will have lower dividend yields than the four-year average from 2018 to 2022, excluding the 2020 exceptions. 3% and 215%。Including the 2020 sample, the 2023 S&P 500, Nasdaq, and Dow Jones indices have lower dividend yields than the 5-year average from 2018 to 2022. 0% and 192%。
Figure 2: U.S.** Dividend Yield (%)
Data**: wind. Data for 2023 is as of December 15.
Overall, compared to the situation in the past five years, the valuation of U.S. stocks in 2023 is too high, and the dividend yield is declining. The overall reflection in the financial markets is the rise in investors' risk appetite, with the global VIX (CBOE volatility) index falling by 43 percent so far this year3%, which also supports this judgment.
From the perspective of housing prices, the price of housing in the United States this year is the first. In 2023, under the suppression of high interest rates, the supply and demand of real estate in the United States have contracted, and high interest rates have reduced the demand for real estate, but also significantly reduced the supply of real estate, and the inventory of real estate in the United States is only half of the pre-epidemic level, and the lack of supply has led to the continued rise in housing prices. The S&P Case-Shiller Housing Index showed that the average U.S. home price increased by 3 percent in September 2023 from a year earlier9%。Since 2023, the average home price in the United States has been **66%。
According to the U.S. Financial Accounts data released by the Federal Reserve for the third quarter of 2023, the net wealth of U.S. households in the third quarter of 2023 increased by 7 percent compared to the fourth quarter of 2022$33 trillion, with excessive financial assets being the main reason. Compared to the second quarter of 2023, the third quarter decreased by 1$31 trillion, of which the value of equity held directly and indirectly fell by about 17 trillion dollars, but the value of real estate increased by 0$5 trillion.
It can be seen that the reason why core inflation in the United States is declining slowly and core inflation is stubborn, which is supported by the tight labor market and the wealth effect in the financial market. The wealth effect of tight labor markets and oversized risk assets constitute the "twin pillars" that support the slow downward trend in core inflation in the United States.
Against the backdrop of slow core inflation and low unemployment, the Fed's monetary policy is facing new problems, and the Fed needs to cool down the US financial market both for a "soft landing". In terms of the choice between the cooling of the labor market and the cooling of the financial market, the Fed may be more inclined to cool the financial market and release the risk of excessive assets.