As you may recall, at the end of 2021, there were some worrisome signs in the U.S. economy, such as rising inflation, tight chains, labor shortages, declining consumer confidence, etc. In response to these problems, the Federal Reserve has embarked on a monetary policy of raising interest rates and shrinking its balance sheet, with the intention of controlling inflation and stabilizing financial markets.
However, this move has triggered an even bigger crisis, and the growth rate of the US economy has slowed down significantly, and even negative growth has appeared, and the US may fall into a deep recession. Faced with such a situation, the Federal Reserve hurriedly changed its monetary policy, not only has stopped raising interest rates, but may even enter the interest rate cut cycle ahead of schedule.
Perhaps soon everyone will see the familiar scene reappear, that is, the United States has begun to release water again. The Fed will print a lot of money, buy bonds, and inject liquidity into the market to stimulate the economy and finance. What is the effectiveness and impact of this policy?Can the U.S. get out of recession?
The Federal Reserve is the leading bank in the United States, and its monetary policy has an important impact on the economy and finance of the United States and the world. The Fed's main goal is to maintain the stability of inflation and promote economic growth. To achieve these goals, the Fed influences the market's interest rates and currencies primarily by adjusting federal** interest rates and adjusting its balance sheet.
The Federal** interest rate is the short-term lending rate between U.S. banks, it is the main policy tool of the Federal Reserve, and it affects various other interest rates such as mortgage rates, credit card rates, business loan rates, etc.
The Federal Reserve regulates federal** interest rates by raising or lowering interest rates, which affects lending and investment activity in the market. In general, raising interest rates tightens monetary policy and reduces inflationary pressures, but they also dampen economic growth;Cutting interest rates eases monetary policy and stimulates economic growth, but it also increases inflation risks.
The balance sheet is another policy tool of the Fed that reflects the size and structure of the assets and liabilities held by the Fed. The Fed's assets are mainly purchased **bonds and mortgage-backed**, and the Fed's liabilities are mainly issued dollar currencies and bank reserves.
The Fed adjusts its balance sheet by expanding or shrinking its balance sheet, which affects the market's money** and liquidity. In general, expanding the balance sheet increases money**, lowers interest rates, and stimulates the economy and finance;Shrinking the balance sheet reduces money**, raises interest rates, and depresses the economy and finance.
The Fed's monetary policy is formulated and adjusted in response to the actual situation and expected changes in the US economy. At the end of 2021, there were some negative signs in the US economy, such as inflation rising to a 40-year high of 68%, well above the Fed's 2% target;There has been a serious strain in the chain, which has led to shortages of goods and services and ***
There has been an imbalance in the labor market, with the unemployment rate falling, but the number of employed people is still below pre-pandemic levels, while the labor force participation rate has also fallen, suggesting that some people are giving up on looking for work;Consumer confidence has declined, and consumers are dissatisfied and worried about the prospects of the economy and their own incomes.
These questions all point to the headwinds of the U.S. economic recovery, and even the risk of a recession. In response to these problems, the Federal Reserve has embarked on a monetary policy of raising interest rates and shrinking its balance sheet, with the intention of controlling inflation and stabilizing financial markets.
At its December 2021 meeting, the Fed announced that it would accelerate the pace of balance sheet reduction starting in January 2022, reducing asset purchases by $15 billion per month, and expected to end its balance sheet reduction in March 2022. The Fed also hinted that it will start raising interest rates in 2022 and is expected to raise interest rates three times in 2022 at 025 percentage points to increase the federal ** interest rate from the current 0-025% to 075-1%。
This move by the Federal Reserve is considered a kind of "tightening" or "tightening" policy for the US economy, aiming to curb the spread of inflation, protect the value of the dollar, and maintain financial stability. However, this move by the Federal Reserve has triggered an even greater crisis, and the growth rate of the US economy has slowed down significantly, and there is even a possibility of negative growth, and the US may fall into a severe recession.
The Fed's policy of raising interest rates and shrinking its balance sheet has led to an increase in interest rates and the cost of funds in the market, which has curbed borrowing and investment activities and reduced economic demand and output. At the same time, the Fed's policy has also caused panic and uncertainty in the market, resulting in large fluctuations in the ** and bond markets, triggering financial turmoil and risks.
What's more, the Fed's policies have also hit consumer and business confidence and expectations, leading to a contraction and delay in consumption and investment, exacerbating the economic downturn and recession. According to statistics, the growth rate of the US economy in the first quarter of 2022 was only 05%, the lowest level in a decade, and in the second quarter of 2022, the US economy even appeared -0A negative growth of 3% indicates that the US economy has entered a technical recession.
Faced with such a situation, the Federal Reserve hurriedly changed its monetary policy, not only has stopped raising interest rates, but may even enter the interest rate cut cycle ahead of schedule.
The Fed's emergency pivot is undoubtedly a shot in the arm for the US economy and finance, as well as a signal to the global market. The Fed's interest rate cuts and balance sheet expansion aim to reduce the interest rate and cost of funds in the market, increase liquidity and credit in the market, stimulate market demand and investment, alleviate market panic and uncertainty, stabilize market expectations and confidence, and prevent further economic downturn and recession.
The Federal Reserve's interest rate cuts and balance sheet expansion are conducive to the recovery and growth of the U.S. economy. On the one hand, interest rate cuts and balance sheet expansion can reduce the borrowing costs of businesses and households, increase their disposable income and profits, thereby increasing their consumption and investment, and driving economic demand and output.
On the other hand, interest rate cuts and balance sheet expansion can reduce the volatility and risk of the financial market, improve the stability and activity of the financial market, thereby increasing the asset and wealth effect of the financial market, and promoting economic confidence and expectations.
According to the Federal Reserve, the U.S. economy will gradually return to its normal growth level in the second half of 2022, reaching 2around 5%, while inflation will also fall back below 2%, in line with the Fed's target. The Fed's interest rate cuts and balance sheet expansion are not conducive to the appreciation and stability of the dollar. On the one hand, interest rate cuts and balance sheet expansion will reduce the interest rate differential advantage of the US dollar, reduce the attractiveness of the US dollar, lead to an increase in the US dollar, a decrease in demand, and thus depreciate the US dollar.
On the other hand, interest rate cuts and balance sheet expansions will increase inflationary pressures and weaken the purchasing power of the dollar, thereby depreciating the dollar. According to the trend of the dollar index, the dollar has already seen a significant ** in the first half of 2022, falling from 93 points to 88 points, hitting a new three-year low.
The Fed's emergency pivot is a major shock and impact on the economy and finance of the United States and the world. The Fed's interest rate cut and balance sheet expansion are not only conducive to the economic and financial recovery and growth of the United States and the world, but also to the economic and financial balance and coordination of the United States and the world.
The effectiveness and impact of the Fed's policies will also depend on the actual situation and expected changes in the epidemic and the economy in the United States and the world, as well as the policy response and coordination of other countries. In this context, we should keep a clear head, make prudent judgments, make reasonable arrangements, and actively respond to the Fed's policy shocks and impacts, and grasp the Fed's policy opportunities and challenges.