With the release of a series of financial data and reports, it has become a foregone conclusion that the United States will delay interest rate cuts in 2024.

Will the Federal Reserve postpone the timing of interest rate cuts again?

Note that the postponement of interest rate cuts in the United States will not only affect U.S. Treasury yields, the operation and stability of the U.S. financial industry, but also have a very significant negative impact on the world, including China.

So, how will the United States cut interest rates this year? What kind of negative impact will this have on China's economy? How should we respond? Today, let's talk about this topic. It's not easy to write, so welcome to like, forward, and collect.

The Federal Reserve releases a heavyweight report and is not in a hurry to cut interest rates?

This Friday, the Federal Reserve released its semi-annual monetary policy report. This report is a link between the past and the future and has important reference significance for us to understand the Federal Reserve's expectations for interest rate cuts.

The report pointed out that although the threats faced by the U.S. banking industry have almost dissipated, there are still certain weaknesses in the U.S. financial industry; regarding the inflation issue, the report reiterated that Federal Reserve officials are committed to bringing inflation back to a normal level of around 2%.

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The Federal Reserve releases the semi-annual monetary minutes

This means that the Federal Reserve is actually not in a hurry to cut interest rates. As long as inflation has not fully met the target, interest rate cuts are unlikely to arrive. The President of the Chicago Federal Reserve said: "The current interest rate hike cycle will last as long as it wants until inflation in the United States fully achieves the target."

And the third in command of the Federal Reserve, Barkin, also believes: I think the Federal Reserve should not rush to cut interest rates because I still see wage and inflation pressures in the U.S. market.So, when the market was still predicting that the Federal Reserve would announce a rate cut on March 20th two months ago, and now the probability of a rate cut has fallen to less than 5%, all of this is due to the unresolved inflation issue in the United States.

The views of Federal Reserve officials and the perspectives of reports are actually based on evidence: for example, the CPI and PPI indexes released in January both greatly exceeded market expectations, which means that inflation in the United States has not only failed to retreat but has actually shown a warming trend.

Furthermore, the Markit manufacturing PMI for February announced by the United States on Friday was 52.2%, exceeding expectations and previous values, indicating that the U.S. economy is still relatively strong, which also suggests that the possibility of upward inflation in the United States is continuously increasing.

More importantly, the core personal consumption expenditure price (PCE) index announced on Thursday showed a month-on-month growth of 0.4%, reaching the fastest growth rate in a year, which means that the current contradiction in the United States is not that the economic growth is not strong enough, but rather that the economy is too strong, leading to a rapid rebound in inflation.

Core PCE index announced, with a month-on-month increase of 0.4%

As Powell has repeatedly emphasized: The Federal Reserve's focus is only one, that is, to "bring inflation back to the normal level of 2%", and other tasks must take a back seat.

Will the Federal Reserve's postponement of rate cuts be bearish for the world economy?

The Federal Reserve here stops cutting interest rates, but for the global economy, it is a relatively large bearish factor.

Firstly, the growth of the U.S. stock market in this round actually comes from the release of rate cut signals. If the rate cut event is postponed time and time again, then the driving force for the rise of the U.S. stock market actually weakens, which is a bearish factor for the U.S. capital market, European capital market, Chinese stock market, and even all countries around the world.

So, the postponement of interest rate hikes actually hits the financial industry of various countries. After all, the time for easing has been postponed, and the expected "funds" from the stock market have decreased, so the driving force for the stock market to rise will decline. The U.S. stock market in the recent period has also proved this point with actual actions.The Federal Reserve's postponement of interest rate cuts hits global stock markets

The delay in interest rate cuts not only affects the stock market but also has a certain impact on commodities priced in US dollars, including gold and energy. For example, the previous expectations of interest rate cuts led to a decline in the prices of many commodities. However, as the expectations of interest rate cuts weaken, the Federal Reserve is expected to continue maintaining the current high interest rates, leading to a continued strengthening of the US dollar.

For developing countries, the Federal Reserve's decision not to cut interest rates means that the US dollar continues to strengthen in the foreign exchange market, which will continue to impact the foreign exchange of many countries. For instance, the foreign exchange of countries like Argentina, Sri Lanka, and Turkey has been affected, and other similar small countries have no choice but to sell foreign exchange reserves to stabilize their national exchange rates.

For developing countries with a heavy burden of external debt, they will inevitably face significant debt repayment pressure, which will be bearish for these countries' real economy, financial systems, and even pose the risk of a financial crisis.

US dollar hegemony, harvesting the world

Why did we previously say that the US interest rate hike is "harvesting the world"? It is because a strong US dollar is actually a significant bearish factor for most developing countries. Even a powerful country like China, the world's second-largest economy, is no exception.

Is the postponement of interest rate cuts bearish for China? How should we respond?

From the current perspective, since the Federal Reserve is at the end of the interest rate hike cycle and has not cut interest rates, there is certain pressure on China's exchange rate and the interest rate differential between China and the US, which is bearish for China's finance.

Let's first look at the foreign exchange aspect. The depreciation of the Chinese yuan actually began with the Federal Reserve's interest rate hike in March 2022. Since then, as the US interest rate hike cycle changes, we have been defending the 7.3 yuan: 1 US dollar threshold.

In the past few days, with the release of the signal that the Federal Reserve is delaying interest rate cuts, the exchange rate has depreciated from the previous 7.10 to 7.196 yuan, which means that there is still a significant depreciation pressure on the yuan exchange rate. Although there is no need to fight a "currency defense war" as before, it is still necessary to remain vigilant.Let's take a look at the interest rate differential between China and the United States. The so-called interest rate differential refers to the difference in interest rates on 10-year government bonds, which represents the interest rates on deposits in China and the United States.

According to the latest data from March, the interest rate on China's 10-year government bonds is 2.38%, while the interest rate on U.S. 10-year government bonds has risen to 4.19%, resulting in a significant interest rate differential of 1.8% between China and the United States. An increased interest rate differential means that the same amount of capital earns more when deposited in the United States compared to China, leading to capital outflows. This, in turn, affects China's utilization of foreign investment and the growth rate of the Chinese economy.

This is also why, in recent months, we have introduced a series of plans to attract foreign investment. Many foreign investors who were originally planning to invest in China have been drawn away by the high interest rates in the United States.

China has been in a cycle of interest rate cuts, while the United States is still at the end of its interest rate hiking cycle. If we follow the judgment of the interest rate cut in March, the interest rate differential between China and the United States should have narrowed.

However, with the worsening inflation in the United States, the timing of the interest rate cut has been delayed, and the magnitude of the cut has been reduced. This means that the interest rate differential between China and the United States, which should have narrowed, still exists and has even expanded. Therefore, just the foreign exchange and financial aspects will have a significant impact on the Chinese economy.

In terms of the real economy, the impact is actually on the recovery of China's foreign trade.

Since the Federal Reserve's first interest rate hike in March 2022, China's economy has been supported by two legs, namely domestic consumption and investment. The economic growth provided by foreign trade has been continuously declining.

The Chinese economy in 2024 could have relied on a significant recovery in foreign trade to provide some momentum. However, with the Federal Reserve not cutting interest rates, countries around the world will still face a "tight funding" environment. Without an increase in purchasing power, the demand for Chinese goods will not recover.

Although China's foreign trade has stabilized, we hope it can perform better.

If the recovery of demand for Chinese goods slows down, the recovery of China's foreign trade imports and exports will also slow down, ultimately affecting the real economy.It should be recognized that the main contradiction in China at present is actually the relative overproduction and the structural insufficiency of domestic demand. If consumption cannot be absorbed domestically, then it can only rely on foreign demand. When external demand from abroad also encounters problems, economic recovery will face obstacles.

How should China respond?

Why do we dislike the Federal Reserve for not playing by the rules? In fact, it is because the policy changes of the Federal Reserve have too much impact on the economies of various countries.

According to the current interest rate reduction events, the earliest interest rate reduction time has been postponed from March to June. Some private equity giants even predict that there will be no interest rate cuts this year. And the market's general perception of the interest rate reduction intensity has also been reduced from the previous 150 basis points to 75 basis points or even lower.

It can be seen that the current interest rate reduction cycle of the Federal Reserve has not ended, and the high interest rate of 5.25%-5.5% will still be maintained for a period of time. This has also led to the slow recovery of China's economy.

The central bank may continue to cut interest rates to stimulate the economy.

If we want to respond and break the deadlock, we still need to start from both domestic and foreign demand. One is to stimulate consumption internally, not only to stimulate the people to spend money on consumption. More importantly, through the dual stimulation of fiscal and monetary means, the government should spend money to create internal demand.

For external demand, continuously increasing the number of visa-free countries, optimizing foreign capital, attracting foreigners to travel, do business, and settle in China, etc., can all attract foreign capital and stimulate economic growth. China also needs to continue to go out in foreign trade, give full play to our manufacturing advantages, and undertake foreign infrastructure and other demands.

Why do we want to carry out the Belt and Road Initiative? This is because with the continuous efforts of engineers and scientists, we have conquered many "crowns" in the industrial field. Our productivity is surplus domestically, and this capacity needs to go abroad to undertake projects and sell products to be digested. Otherwise, there will be problems such as structural insufficiency of domestic demand and overcapacity.

Of course, more importantly, we need to continue to reform income distribution, allowing the vast majority of people to earn more money, narrow the wealth gap, rather than making the rich richer and the poor poorer. After all, spending money is actually the simplest thing. When people have money, they are willing to spend it.China's fundamental economic foundation is solid, and China's economic development still has tremendous potential!

In conclusion, I believe that the basic economic foundation of China is stable and solid. Despite the high winds and waves outside and the United States causing trouble, when looking at per capita GDP, we are only one-sixth of the United States. This means that China's economic development still has significant economic growth momentum.

I believe that with the continuous deepening of reforms and the continuous breakthroughs in labor and capital factor restrictions, we can continue to release and explore the potential of China's economy. This will allow China's economy to continue to recover and achieve a GDP growth rate of more than 5% this year, writing a new chapter in the great rejuvenation of the Chinese nation! Go, China's economy!