Recently, against the backdrop of the continuous escalation of the banking crisis and the looming threat of recession, the Federal Reserve had to raise interest rates again in order to contain the troubles of inflation, which further increased the concerns of all parties about the situation of the US economy.
Strong interest rate hikes fail to resolve inflation problems In the 2020 recession and 2021 recovery caused by the pandemic, the US economy has performed well. Compared with the euro zone and Japan, its economic growth rate has dropped by 3.3 and 1.5 percentage points in 2020 , and will increase by 0.5 and 3.8 percentage points in 2021. However, the United States will also bear the brunt of the new round of price increases starting in the second half of 2021. By the third quarter, its consumer price inflation rate reached 5.3% year-on-year, 2.5 percentage points higher than that of the euro area, while Japan still had a negative growth rate of 0.2%. Entering 2022, especially after being “exacerbated” by the Ukrainian crisis, U.S. prices will accelerate like a “runaway horse”. By June 2022, its consumer price inflation rate has risen to 9.1% year-on-year, the highest in nearly 40 years, higher than the 8.6% in the euro zone, and higher than Japan’s 2.4%.
In the face of intensifying inflation, the Federal Reserve had to “make up for it”, and began to raise interest rates strongly or aggressively in March 2022. So far, it has raised interest rates ten times in a row, reaching a total of 500 basis points, setting a record for short-term intensive interest rate hikes. record. Although interest rate hikes have played a certain role in curbing inflation, the year-on-year increase in consumer prices will start to decline from July 2022, to 6.5% in December, and to 5.0% in March 2023, but it is still far from reaching With the policy target of 2%, there is still a long way to go to control inflation. The data recently released by the US Department of Commerce even showed that US inflation indicators are still accelerating. In the first quarter of 2023, the personal consumption expenditures price index rose by 4.2%, not only higher than the forecast of 3.7%, but also the largest increase in nearly a year. The reason why the strong interest rate hike is far from dispelling the inflation problem is quite complicated. In addition to the above-mentioned interest rate hike being started too late and missing a good governance opportunity, the impact of the pandemic and geopolitical conflicts have caused supply chain disruption and aggravated the imbalance between supply and demand in the market. These should be the main reasons. Relying on raising interest rates alone to curb demand cannot solve all problems.
Growth stalls encounter financial risksRaising interest rates is a “double-edged sword”, especially a strong or aggressive interest rate hike will lead to more serious consequences. In the context of broken supply chains that aggravate the imbalance between supply and demand in the market, trying to curb demand through forceful interest rate hikes will not only fail to achieve inflation control goals, but will also cause a strong impact and serious hindrance to economic growth. In fact, the real GDP growth rate of the United States has experienced negative growth for two consecutive quarters in the first half of 2022, respectively -1.6% and -0.6%. By traditional standards, this is a typical cyclical recession. Although it rebounded to 3.2% in the third quarter, it slowed down significantly again, falling to 2.6% in the fourth quarter and 1.1% in the first quarter of 2023. It is widely predicted that the U.S. economy is slipping into a “moderate recession.”
What’s more serious is that while the growth has stalled due to the strong interest rate hike, it has recently encountered financial risks marked by bank failures. On May 1, the California Bureau of Financial Protection and Innovation announced the closure of First Republic Bank, which was taken over by the Federal Deposit Insurance Corporation, which in turn hired JPMorgan Chase Bank to acquire all of its savings deposits and remaining assets. First Republic Bank ranks 14th in terms of assets in the United States, and has 84 branches in eight states. It has become the second largest bankrupt commercial bank in the history of the United States, second only to Washington Mutual Bank, which collapsed in the 2008 financial crisis. After Silicon Valley Bank and Signature Bank, it is the third commercial bank to close down in nearly two months amid the new round of financial turmoil. The analysis shows that the direct reason for the collapse of these three banks is that the Federal Reserve’s aggressive interest rate hikes have led to a sharp decline in assets and increased book losses, which has caused a large number of runs on customers, and the capital chain has been crushed and broken, and they have fallen into a hopeless business situation. What’s more serious is that there are many other banks facing similar predicaments as these three banks, and it is inevitable that they will fall into the same hopeless situation. This is the main reason why people from all walks of life are generally worried about whether the financial crisis 15 years ago will be revived.
The difficulty of raising interest rates combined with the debt dilemma On the one hand, lingering inflation, on the other hand, growth stalls, and financial risks have become more serious. This has led to the Fed’s monetary policy dilemma, and has also ignited fierce debates among relevant circles. On May 3, based on the primary responsibility of controlling inflation and stabilizing prices, the Federal Reserve still withstood the pressure from all parties and chose to raise interest rates for the tenth time since March 2022. Chairman Powell also stated again that he must do everything possible to keep the inflation rate down to 2%. However, it remains to be seen whether it can withstand the enormous pressure of the approaching economic recession, the intensification of the financial crisis, and the strong resistance of all parties concerned.
While the Federal Reserve is in a dilemma of raising interest rates and it is difficult to increase monetary policy to improve the poor situation of the US economy, the US federal government is also in debt, so it is difficult to strengthen fiscal policy to play the same role. According to Treasury Secretary Janet Yellen’s calculations, the federal government’s current borrowing progress will “peak” by June 1—touching the “red line” of US$31.4 trillion in debt set by Congress for the federal government. If Congress does not authorize the raising of this debt ceiling, the federal finances will not be able to issue new debt to repay maturing national debt, thus falling into the risk of default. Whether to authorize the raising of the debt ceiling has now become the focus of the bipartisan struggle in Congress. At the critical moment when the new round of presidential election is approaching, it is more difficult for Congress to reach a compromise than ever before. A few days ago, President Biden clearly told the media that this is his only important agenda at present, and if the issue is not properly resolved, he will not attend the upcoming G7 summit meeting in Japan. However, on May 9, his consultations with the leaders of both parties in Congress still failed, and the prospects are not optimistic.