Entering March 2020, although not many people were diagnosed with the New Coronavirus in the United States at that time, the economic and social impact of the major New Coronavirus outbreak in many countries had already reacted to the U.S. stock market and other financial markets, and triggered extreme panic in the stock market and extreme strain on the U.S. dollar. For this reason, the Federal Reserve not only quickly and significantly reduced the federal funds rate to the level of 0-0.25%, but also quickly launched an unlimited quantitative easing monetary policy, strongly supporting the government to expand the fiscal deficit and the size of the debt, and the size of the Fed’s assets and liabilities then expanded rapidly, from $4.15 trillion at the end of February 2020 to more than $8 trillion in June this year, almost doubled. Its growth rate far exceeds historical records and is beyond many people’s imagination.
In February 2021, the U.S. Consumer Price Index (CPI) increased 1.7% year-over-year and 0.4% year-over-year, while the core CPI, excluding food and energy prices, increased 1.3% year-over-year. From March, the U.S. CPI showed an accelerated climb to stay high: the CPI rose 2.6% year-over-year and 0.6% year-over-year in March. Core CPI rose 1.6% year-over-year and 0.3% sequentially; CPI rose 4.2% year-over-year and 0.8% sequentially in April. Core CPI increased 3% year-over-year and 0.92% sequentially; CPI rose 0.6% sequentially and 5.0% year-over-year in May. Core CPI rose 0.7% YoY and 3.8% YoY; CPI rose 0.9% YoY and 5.4% YoY in June, making it the highest level since 2008. Core CPI rose 0.9% YoY and 4.5% YoY, the largest increase since November 1991.
The CPI growth rate surpassed 2% year-over-year for the first time in a row, making many believe that the Fed will inevitably contract the massive quantitative easing monetary policy launched in response to the impact of the new crown epidemic and enter the interest rate hike channel. But the fact is that since May the Fed has been stressed: Although inflation data has risen significantly and may last several months before easing, but pushing up the CPI rate is mostly short-term special factors, high inflation may be a temporary phenomenon, the economic outlook is still a lot of risk, the Fed is still waiting for more policy adjustment signals, will maintain the current scale of bond purchases to provide support for the economy until the promotion of employment and Stabilize prices both objectives have made substantial progress. If convinced that future inflation will continue to exceed the target level, will adjust monetary policy in due course.
On July 28, EST, the Federal Reserve Open Market Committee (FOMC) held a rate meeting, and members unanimously agreed to keep the benchmark interest rate unchanged in the range of 0%-0.25%, maintaining the June 16 arrangement of raising the excess reserve rate (IOER) from 0.1% to 0.15% and raising the overnight reverse repo rate from 0.00% to 0.05%, both of which remain unchanged; establish the Standing Repo Facility (SRF), which will conduct daily overnight repo operations on Treasuries, agency debt certificates, and agency mortgage-backed securities, capped at $500 billion, with a minimum bid rate of 0.25 percent, effective July 29; continue to hold at least $80 billion in additional Treasuries and at least $40 billion in additional home mortgage-backed securities each month until the Committee’s full employment and price stability goals make substantial progress to ensure that monetary policy continues to provide strong support for the economy.
So, why does the Fed insist that the high CPI is temporary and insist that stimulative monetary policy will not be adjusted?
This may mainly exist the following considerations.
First, the impact of CPI year-on-year base factors.
A single look at the CPI growth rate in the United States since March this year, the CPI growth rate, indeed, greatly exceeded the 2% level, but there is a serious impact of the new crown epidemic in 2020, the U.S. CPI growth rate from the base of the rapid decline in March, more importantly, should examine the two-year average change (after the high CPI growth this year, will also affect the magnitude of year-on-year growth in the same period next year, next year should still be (focus on the examination of the two-year average).
If we calculate the CPI average for two consecutive years, it has actually remained around 2% through May this year, and has not deviated too much from the Fed’s policy target of 2% average growth. Although the June year-over-year two-year average reached 3.0%, which is higher than the longer-term average policy target of 2%, it also still falls within the normal range of adjustment (macro-control generally requires a certain degree of overkill), and the stability of the adjustment effect still needs to be observed.
Considering that the CPI year-on-year increase continued to rebound from June to August 2020 and was basically stable from August to the end of the year, it is the trend of CPI year-on-year increase in the U.S. from June to August this year, especially in August, that is the key to judge the extent of its inflation and to make decisions on whether monetary policy needs to be adjusted more, and it is still not the time to make a policy turn.
Second, the different causes of inflation generation.
Nowadays, inflation is mainly judged by the rate of CPI increase, and there are two different situations: one is triggered by the trend of oversupply due to the continuous expansion of demand driven by various reasons; the other is triggered by temporary oversupply due to unexpected events in the overall state of overcapacity and underdemand. In the former case, measures should be taken to raise interest rates to curb demand and to control monetary investment to prevent excessive growth in investment and consumption and the accumulation of hidden risks to economic, financial and social stability. In the latter case, efforts should be made to protect rather than suppress the rare demand by lowering interest rates and expanding money injection as much as possible to stimulate the recovery of production and supply and maintain economic and social stability.
There is no doubt that the sharp year-on-year rise in the CPI in the U.S. so far this year belongs to the latter category. Therefore, not because of the CPI rose sharply, regardless of the reason for the implementation of a single-mindedly to raise interest rates, control money to suppress, otherwise it may be counterproductive.
Third, the objective need to respond to major crises.
Since the outbreak of the “Great Depression” in the last century, the results of the major economic and financial crises or natural and man-made disasters have proved that whether the timely implementation of macro policy stimulus and relief of sufficient strength, the results are completely different.
After the outbreak of the global financial crisis in 2008, it was the swift and unprecedented joint bailout campaign by the major economies, especially the largest economic stimulus by China, that helped contain the rapidly worsening crisis and prevent a once-in-a-century disaster like the “Great Depression”.
The outbreak of the new crown pneumonia epidemic in 2020 quickly swept the world, bringing many national and international economies to a standstill, and its short-lived impact worldwide far exceeded that of the 2008 global financial crisis or even the Second World War. Under such circumstances, the U.S., which has the international central currency and international financial center, can hardly organize and mobilize the whole society to respond to extraordinary events and participate in the prevention and control of the epidemic, as China did, and is bound to suffer a greater impact. Not only will the situation in the United States out of control, but also will make the global situation are difficult to control.
After the great outbreak of the new crown epidemic, the United States, Europe, Japan and other major economies rely more on macro policies for stimulation and rescue, have adopted unlimited quantitative easing monetary policy, support the government to expand the fiscal deficit and the scale of debt, while supporting the control of the epidemic and economic recovery, but also is bound to take huge risks: if the global epidemic can be effectively contained in time, the global economic operation can resume normal operation, it may If the global epidemic can be effectively contained in time and the global economy can return to normal operation, the global overcapacity, insufficient demand and persistently low commodity prices before the epidemic will be restored, and the current high inflation rate will soon pass and macro policies may speed up the return to normality. However, if the global epidemic is not contained in time, the global shortage of production and transport disruptions caused by the epidemic will continue to drive the phase of oversupply of commodities and prices rise sharply, and for those countries that rely heavily on imports of essential goods, the degree of economic stagflation will be more severe, and macroeconomic policies will actually have to maintain a high level of stimulus, making it difficult to return to normal, and temporary inflation will may develop into serious long-term stagflation. This is still a very critical period of stagnation and observation. The Fed is also committed to adjusting monetary policy in due course if it is confirmed that inflation will significantly and consistently exceed its target.
In any case, in the face of a sudden major crisis shock, maintaining stability is overriding and must be responded to with timely macro policy of sufficient strength. At this point, the emphasis on the neutrality of monetary policy (the pursuit of price or currency stability) and the independence of the central bank should not be stopped. In fact, credit money is no longer the credit or liability of the central bank, like metal standard paper money, but the credit of the state, which gives the prerogative of money placement and management to the central bank, so the central bank and monetary policy must be subordinated to the overall national strategy and goals, and central bank independence and monetary policy neutrality are relative, even in the U.S., too. The Federal Reserve now emphasizes that it remains committed to a full range of policy tools to support economic development and social stability in these challenging times until the Committee’s goals of full employment and price stability make substantial progress. This, “full employment” before “price stability”.
Based on the above analysis, it is believed that August is the most critical observation period for U.S. monetary policy, and the Fed will not easily make large adjustments to monetary policy before the end of August.