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抗通胀+稳经济+救市场,美联储正面临一个“不可能三角”

Combating inflation+stabilizing the economy+saving the market, the Federal Reserve is facing an “impossible triangle”

Wallstreet News ·  Mar 20, 2023 23:56

Source: Wall Street News
Author: Han Xuyang

El-Erian believes that the Federal Reserve is likely to choose a compromise solution at this meeting to keep policy options open. The Federal Reserve may keep interest rates unchanged while providing forward-looking policy guidance, indicating that this is a short “pause” rather than the end of the interest rate hike cycle.

The Federal Reserve must come up with a stronger policy.

On Sunday local time, Mohamed El-Erian, a well-known economist and chief economic adviser of Allianz Group, said in a column published in the media that$SVB Financial (SIVB.US)$,$Signature Bank (SBNY.US)$with$Silvergate Capital (SI.US)$After three banks went out of business one after another and US regulators took urgent steps to bail out the market, the Federal Reserve's policy now faces multiple difficulties. This week's interest rate decision is particularly important.

El-Erian said the failure of the three banks reflected the Fed's mishandling of the change in the interest rate system. After allowing the financial environment to be too relaxed for too long, the Federal Reserve hit the brakes only after mistakenly characterizing inflation as “temporary” for a long time, and it was too late.

El-Erian said this made some institutions feel uncomfortable, and it is now likely that loan standards will generally be tightened as a result.The Federal Reserve now faces a difficult “impossible triangle”: how to simultaneously reduce inflation, maintain financial stability, and minimize damage to economic growth and employment. As maintaining financial stability runs counter to the goal of tightening monetary policy to reduce inflation, this situation made policy decisions this week more complicated.

Less than two weeks ago, the market had a 70% chance of the Fed raising interest rates by 50 basis points this week, but now they have switched to not raising interest rates or even cutting interest rates sharply thereafter.

El-Erian said he wouldn't be surprised if the Federal Reserve tried to be vague this week, again using “data dependency” as an excuse. But now it's not as easy as it used to be, because this approach gives rise to two conflicting choices: whether to respond to overheated economic data by raising interest rates by 25 basis points, or to respond to volatile markets by keeping interest rates unchanged or cutting interest rates?

According to El-Erian,The Fed's decision-making experience over the past few years suggests that it is likely to choose a compromise solution that keeps policy options open during a period of turmoil and uncertainty. The Federal Reserve may keep interest rates unchanged while providing forward-looking policy guidance, indicating that this is a short “pause” rather than the end of the interest rate hike cycle.

He said this would not be an effective compromise. Conversely, the Federal Reserve's multiple woes will worsen as tighter lending standards lead to a bleak outlook for economic growth, the vulnerability of banks and other financial firms increases the risk of financial stability, and inflation becomes more difficult. A vague neutral stance will not provide the US with the monetary policy anchor it lacks and urgently needs; on the contrary, it will lead to more policy capriciousness, an inability to achieve a soft landing, and amplify troubling financial fluctuations.

El-Erian believes that in the short term, the Federal Reserve should follow the ECB's example, clearly communicate the risk of using monetary policy for multiple conflicting goals, and emphasize the uniqueness of its policy tools rather than vaguely confusing them. Addressing the Fed's structural weaknesses, including weak accountability and lack of cognitive diversity, is critical in the long term. The Federal Reserve needs to reformulate the “new monetary framework” adopted in 2020 and consider changing the 2% inflation target system to reflect the global structural shift from insufficient aggregate demand to insufficient supply.

El-Erian concluded,These changes are not easy for the Federal Reserve, but they are far better for America's long-term prospects. If it chooses to continue with the current policy, it will certainly not be possible to achieve low inflation, maximum employment, and financial stability, and it will also increase the political pressure on the Federal Reserve to operate independently.

DBS has also put forward its views on the function of the Federal Reserve. The agency previously held on to expectations of raising interest rates by 25 basis points this week, but its chief economist Taimur Baig also acknowledged that the persuasiveness of this view is weakening. In a report, Baig said:

A very clear and credible central bank may be able to fight inflation by raising interest rates while regulating liquidity to reduce pressure on financial markets. In our opinion, the Federal Reserve is up to the task, but uncertainty is extremely high.

Although Fed officials have repeatedly stated that they intend to continue fighting inflation by continuing to raise interest rates, market fluctuations over the next two days may divert them from this path because they are in desperate need of tightening policy conditions.

Is it a common expectation that the Federal Reserve will not raise interest rates this week?

Currently, many institutions are predicting that the Federal Reserve will make a decision not to raise interest rates at this week's FOMC meeting.

On March 19, local time, the Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss Bank issued a joint statement announcing the strengthening of liquidity supply through a permanent dollar liquidity swap quota arrangement to provide more liquidity support to the global market.

The joint statement said that in order to improve the effectiveness of the swap line to provide US dollar funds, it has been agreed to increase the frequency of seven-day expiration operations from weekly to daily. This operation will begin on Monday (March 20) and will continue until at least the end of April.

Julia Coronado, president of MacroPolicy Liquidity LLC and former Federal Reserve economist, said in response that the Federal Reserve is making global coordination with other central banks to save institutions and maintain liquidity.This suggests that suspending interest rate hikes may be a better option. She added that the Federal Reserve may signal that its “current intention is to focus on stabilizing the liquidity of the banking system.”

According to data released last Thursday, in the week ending March 15, funds borrowed by US banks from the Federal Reserve's guarantee instruments reached a record level, exceeding the high set during the 2008 financial crisis, and reflecting widespread financial constraints.

Evercore ISI analyst Krishna Guha said in a report Sunday evening that a 25 basis point rate hike “remains our basic scenario”, “but foreign exchange swap transactions show global concern about the US. If we see a serious negative reaction from European financial markets to this news, this may prevent the Federal Reserve from raising interest rates this week.”

Furthermore, Goldman Sachs economists also said in the report that due to pressure on the banking system,The Federal Reserve is not expected to raise interest rates this week.

Editor/Somer

The translation is provided by third-party software.


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