09.2019 Life Guide
Good news from International Monetary And Financial Committee. Monetary policy becomes loose again.
Far Eastern International Securities / Chen Mingzhao
Following the subprime mortgage crisis in 2007 and the global financial tsunami triggered by the collapse of Lehman Brothers in September 2008, the Federal Reserve System has reduced the benchmark federal interest rate from 5.25% in June 2006 to 0.25% in December 2008, almost to 0%. In the absence of traditional monetary policy to improve economic problems, the Federal Reserve System is proposing a quantitative easing (QE) policy. What is the impact of monetary easing on the global economy? This issue will be explained by Far Eastern International Securities.
Quantitative easing policy of Federal Reserve System is to buy bonds by printing money. It not only injects liquidity, but also depresses the yield rate of long-term bonds, so that enterprises can borrow and invest at an appropriate cost of capital. There are three rounds, one after the other, which has indeed slowed the global economy down further and effectively prevented the financial system and its related lending activities from collapsing. In response to the liquidity deflation and inflation slump caused by the two European debt crises, the European Central Bank launched the European QE policy in March 2015 in an attempt to replicate the experience of the United States.
Since the second half of 2013, the global economy has been improving gradually. The growth rate of the U.S. economy has exceeded 3% for two consecutive quarters. Since January 2014, Federal Reserve System has started to reduce the size of QE and withdraw completely in October. Then, in December 2015, it began to raise interest rates for the first time since June 2006. By the end of June 2019, interest rates had risen nine times, totalling 2.25%, while the benchmark federal rate had risen from 0.25% to 2.50%. Since the ECB did not start QE policy until 2015 and retired at the end of December 2018, compared with the Federal Reserve System, which has been in the shadow of a trade war for several years in the evening, the ECB is afraid to return to the tone of loose monetary policy before it starts the interest Rate-raising cycle.
Since March 2018, the U.S. -China trade war has not only disrupted the long-running Global trade supply chain, but also caused most economists to worry that trade disputes between the two countries will drag the global economy to a common funeral. This decade-long recovery period has been interrupted. Up to now, the United States has imposed 25% tariffs on 250 billion US dollars of goods imported from China, and China has not given up much, imposing tariffs ranging from 5% to 25% on 110 billion US dollars of goods imported from the United States. For the major countries, China's quarterly economic growth rate in 2018 was 6.8%, 6.8%, 6.5%, 6.4%, 0.4%, 0.1%, 0.2%, 0.37%, 0.45%, 0.20% and 0.0% in the euro area, and 0.37%, 0.45%, 0.20% and 0.0% in Germany. As far as the United States is concerned, it is 2.2%, 4.2%, 3.4% and 2.2%. On the whole, it is not bad in mature countries, but it can still feel that the growth momentum in the second half of the year has declined significantly.
If we look at other economic indicators, we can better highlight the plight of downside risks facing the European and American economies. The ISM manufacturing index, which measures the U.S. manufacturing boom, fell from a high of 61.3 in August 2018 to 51.7 in June 2019, a record low since October 2016; and the ISM non-manufacturing index, which measures the U.S. manufacturing boom, fell from 61.6 in September 2018 to 55.1 in June 2019, a record low since August 2017. On the European market, the overall euro-zone manufacturing index has fallen below 50 for five consecutive months, that is, in a recession; Germany, the largest economy, has fallen below 50 for six consecutive months. In addition, the respective inflation levels of the United States and the euro zone have not been able to reach the target of 2%, and the market's voice for restarting the interest rate reduction cycle is also growing. In the case of weak indicators, the Federal Reserve System of the United States and the European Central Bank tend to change their earlier monetary policy hawkish stance and move closer to the dove position.
Given the slowdown in economic growth, persistent low inflation pressures and unresolved trade disputes between the United States and China, the Federal Reserve System changed its hawkish position at the beginning of the year, which was expected to raise interest rates by two yards this year, and shifted 180 degrees to the pigeon position. Subsequently, in June, on the basis of the further deterioration of the US-China trade war and Huawei's sanctions ban, it will be one of the possible policy measures to reduce interest rates in the second half of the year. According to Federal Fund Rate Futures, as of July 10, the market expects the Federal Reserve System to cut interest rates by one yard and two yards by more than 90% by the end of the year. By contrast, the ECB is more radical in its dove stance. Not only does it mean that overnight deposit rates (-0.4%) which are already at negative interest rates can be further lowered, or that banks can lend money to banks through lower financing rates and then lend money to enterprises to stimulate the economy, but it also means that QE policy, which ended at the end of last year, can not be excluded from restarting in the second half of the year.
Before the Federal Reserve System of the United States and the European Central Bank released the signal of interest rate reduction successively, some central banks of emerging market countries had already taken interest rate reduction measures in response to the impact of the trade war on the market, of which India was the most active. Since the beginning of this year, they have cut interest rates by three yards, while others, such as Malaysia, Philippines and Russia, have cut interest rates by one yard. In Australia, interest rates were cut by 2 yards and in New Zealand by 1 yard. If the Federal Reserve System of the United States and the European Central Bank jointly take interest rate cuts as expected in the second half of the year, together with the Bank of Japan's ongoing and never-exiting loose monetary policy, it will be another synchronized return to the pigeon position of the world's major central banks after the 2008 financial tsunami.
The QE policy launched in response to the financial tsunami has indeed lifted most countries out of the quagmire and gradually moved towards growth. The leading US is the biggest beneficiary of this policy wave. However, the side effect is that the price of financial assets has gone up all the way, wealth has not been redistributed, on the contrary, the poor have become poorer, the rich have become richer, and class mobility has become more difficult. In addition, over-reliance on QE policy is like drug exposure. If we want to maintain the same level of happiness or economic growth, we must use more doses or money to achieve our goals.
Today, it has been about ten years since the financial tsunami. Overall, only the Federal Reserve System of the United States, the Bank of England and the Bank of Canada, among the major central banks, have been able to start the interest Rate-raising cycle at the expected pace in December 2015, November 2017 and July 2017, respectively, with a 9-yard increase (0.25 yards). % 2.50%, 2 codes (0.25%0.75%) and 5 codes (0.50%1.75%). Others, like the European Central Bank, have a major refinancing rate of 0.0% and an overnight deposit rate of - 0.4%. Improving economic activity through interest rate cuts is largely limited. The Bank of Japan's quantitative easing monetary policy has never been withdrawn, with the main interest rate falling to - 0.1%. So there is a worry: when the next economic crisis comes, besides the emerging market countries with high interest rates, as well as the United States and Canada, will the central banks of the euro zone, Britain and Japan have enough monetary policy tools to support the economy?
With the further expansion of downside risks in the future, the market expects the Federal Reserve System of the United States to return to the embrace of interest rate reduction, the ECB to cut interest rates while restarting QE policy, the Bank of Japan to expand its quantitative and qualitative easing monetary policy, and the Bank of England to run out of space for interest rate reduction, not excluding the first time to offer QE policy, accompanied by it. Some emerging market countries have taken interest rate cuts in the first half of the year, and the world will return to the past period of loose monetary policy with hot money. Since 2009, after a brief closure, the Federal Reserve System fundraising party has opened its doors again and welcomed investors.
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