Do you remember the 2008 financial crisis? That year, the subprime mortgage crisis in the United States triggered a global financial turmoil that caused millions of people to lose their jobs, hundreds of billions of dollars of wealth to evaporate, and countless businesses to go out of business.
In response to the crisis, the United States and other developed countries have adopted policies of interest rate cuts and quantitative easing in an attempt to stimulate economic recovery by increasing monetary **. However, the best of these policies are also gradually emerging, including inflation, asset bubbles, debt crises, etc. Now, 15 years later, has the world economy emerged from the shadow of the crisis? The answer is no.
At its last meeting in 2023, the Fed sent a clear signal to the world that in 2024, the world will meet the challenge of recession together, and the Fed's interest rate hike cycle may be forced to end, replaced by a new round of interest rate cuts and large water releases. What does this mean? Why did the Fed make such a decision?
The Federal Reserve is the leading bank in the United States, and its primary responsibility is to formulate and implement monetary policy to maintain economic stability and growth in the United States. The Federal Reserve's monetary policy is implemented primarily by adjusting the federal interest rate, which is the short-term interbank lending rate in the United States, which affects other interest rates and financial markets in the United States and around the world.
The Fed generally holds a quarterly monetary policy meeting, which is followed by a statement announcing the interest rate decision and economic outlook. At its December 2023 meeting, the Fed made a shocking decision that it would increase the federal interest rate from 025% to 0% and announced that a new round of quantitative easing will be launched in 2024, with $100 billion of monthly Treasury and mortgage support**.
This is the first time since the 2008 financial crisis that the Fed has cut interest rates and restarted quantitative easing, and the first time since the 1998 Asian financial crisis that the Fed has cut interest rates without a recession. The move sparked panic in global markets, with the dollar index tumbling, gold and safe-haven assets such as bitcoin soaring, and bond markets volatile.
Why did the Fed make such a decision? According to its statement, the Fed believes that while the U.S. economic growth and job market remain strong, it faces downside risks from around the world, including the debt crisis in Europe, the deflationary woes in Japan, financial turmoil in emerging markets, geopolitical tensions in the Middle East, and the mutation and spread of the new coronavirus.
The Fed expects these risks to erupt in 2024, leading to a global recession, and the United States is not immune. As a result, the Fed has adopted a precautionary monetary policy ahead of schedule in order to provide more liquidity and confidence, cushion the impact of the crisis, and facilitate a smooth transition for the economy.
The Fed's interest rate cuts and quantitative easing policies, while may help ease short-term economic pressures, will also bring long-term economic problems, mainly in two areas: inflation and bubbles. Inflation refers to the price of goods caused by the increase in money, which will erode people's purchasing power, reduce living standards, and affect the stability and development of the economy.
The Fed's interest rate cuts and quantitative easing policies will increase the value of the dollar, leading to the depreciation of the dollar, thereby pushing up the global price level, especially for those countries and regions that are pegged to the dollar or dependent on imports, inflationary pressure will be greater.
According to the International Monetary Organization, in 2023, global inflation has reached 55% is the highest level in the past decade, while inflation in the United States is as high as 68%, the highest level since 1982. If the Fed continues to implement loose monetary policy, the problem of inflation will be even more serious, and it may even trigger hyperinflation, leading to a complete collapse of the currency.
Bubble refers to the unstable market phenomenon formed by assets that far exceed their intrinsic value, which will attract a large amount of speculative funds, cause misallocation of resources, and affect the efficiency and fairness of the economy. The Federal Reserve's interest rate cut and quantitative easing policy will reduce the cost of funds, leading to excessive inflows of funds, thereby pushing up the ** of assets and forming various bubbles.
In the face of the Federal Reserve's interest rate cuts and quantitative easing policies, China, as the world's second largest economy and the largest partner of the United States, has its own coping strategies and attitudes. Overall, China's response can be summed up in two ways: steadiness and autonomy.
Prudence means that China has maintained a relatively stable and moderate monetary policy, not blindly following the pace of interest rate cuts and quantitative easing by the Federal Reserve, but according to its own economic conditions and market demand, flexibly using a variety of monetary policy tools to achieve reasonable growth of the currency, maintain the neutral and tight monetary policy, curb the risk of inflation and bubbles, maintain the basic stability of the RMB exchange rate, and support the development of the real economy.
According to the People's Bank of China, in 2023, the amount of money in China increased by 85%, below the expected target of 10%, while China's inflation rate is only 29%, below the 3% control target, while China's renminbi appreciated by 5 against the dollar2%, up to 6An all-time high of $2. These data show that China's monetary policy is effective and prudent, able to cope with external shocks and challenges, and maintain a balanced and healthy economy.
Autonomy means that China has maintained relative independence and initiative in economic policy, and has not been swayed by the Federal Reserve's interest rate cuts and quantitative easing policies, but has accelerated the adjustment and transformation of the economic structure according to its own development goals and strategic planning, promoted supply-side structural reforms, improved the quality and efficiency of the economy, enhanced the endogenous power and resilience of the economy, expanded domestic and international markets and cooperation, and built a new development pattern.
The Fed's interest rate cuts and quantitative easing are a signal of crisis and an opportunity to challenge. For the global economy and finance, it will bring about the consequences of inflation and bubbles, as well as structural and model changes. For China's economy and finance, it will bring pressure and shock, but it will also bring adjustment and innovation. China should respond to the Fed's policies with a steady and independent attitude, maintain economic stability and development, and contribute to global economic recovery and growth.