It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat,” U.S. Treasury Secretary Yellen said in a speech on May 4, EST. It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat), sparking concern in the market and increasing investors’ worries about the Fed’s monetary tightening.

  Yellen’s comments need not be over-interpreted. Because: (1) Yellen is not a Fed official and has limited direct influence on monetary policy decisions. Even considering the indirect influence the Treasury may exert on the Fed, Yellen would theoretically prefer to see low interest rates, which help reduce the cost of government financing. (2) Yellen’s comments were precautionary, with rate hikes predicated on an overheated economy and sustained inflation, which the Fed does not currently endorse. (3) Yellen clarified in her subsequent remarks that she was not predicting interest rates or offering any advice, and reiterated her support for the Fed’s independence.

  But the volatility Yellen triggered also reminded us that the market is more worried about U.S. inflation than the Fed, and Yellen’s comments only stimulated the market’s sensitive nerves.

  The current Fed looks at inflation more openly, as the Fed believes that the source of inflation is mainly base effects and supply bottlenecks, which are unsustainable. But the market thinks otherwise, and investors are worried that continued fiscal and monetary easing, overlaid with supply bottlenecks, will increase the risk of inflation exceeding expectations, ultimately forcing the Fed to tighten money early, especially by raising interest rates. The market is worried about inflation, but the Fed sees no inflation, and they don’t see it the same way. This makes any talk of inflation or an overheated economy cause the market to worry about rate hikes. It is no exaggeration to say that U.S. stock investors are no less afraid of tight money than A-share investors are of tight credit.

  We believe that the restart of the U.S. “big fiscal” combined with labor supply bottlenecks will support inflation. On the one hand, the U.S. fiscal policy thinking has changed, and the Biden administration hopes to use the opportunity of the Democratic Party controlling both houses of Congress to promote the big fiscal, which may bring the inflation pivot up. On the other hand, supply bottlenecks exacerbate inflationary pressures. Recent U.S. chip shortages, poor supply chain turnover, companies facing “labor shortages” dilemma. These will push up inflation and increase the persistence of inflation in the United States.

  Of course, the trend of monetary policy also depends on the attitude of the Federal Reserve. From the tone of the Fed’s April FOMC meeting, the current Fed is not eager to withdraw from easing, Powell also believes that the recent economic performance is not enough to be called “substantial further progress”. On Monday, New York Fed President Williams and Richmond Fed President Balkin also reiterated the view of maintaining patience. An exception is the Dallas Fed President Kaplan. He said on Tuesday that the Fed should carry out discussions on QE cuts as soon as possible, on the grounds that there is sufficient confidence in the U.S. economic outlook. But Kaplan’s view is not the mainstream view within the Fed, Kaplan also does not have the right to vote in this year. We maintain our previous judgment that the Fed may not discuss QE cuts until July. but in any case, the second quarter inflation pickup will be a test for the Fed.