But the reality of US dollar interest rate cut is cruel, second glance | Economic data looks pretty good
From the latest Beige Book, which provides an overview of the U.S. economic situation, to the Federal Reserve’s most favored inflation indicator, the April Consumer Expenditure Price Index, a series of reports and data recently released by the United States seem to make the current economic situation look pretty good. Are these data sufficient to support expectations of a rate cut in June?
The Federal Reserve's May Beige Book of Economic Conditions released last Wednesday showed that the U.S. economy grew slightly during the survey and the labor supply situation was basically stable. But business pessimism about the future is growing. Inflation rose modestly due to weak consumer demand. The U.S. Consumer Expenditure Price Index, released two days later, showed signs of cooling inflation, with core PCE hitting a three-year low year-on-year. As the Fed's most favored inflation indicator, PCE can reflect changes in consumer behavior and more accurately reflect the actual cost of living. At the same time, PCE is also an important macroeconomic data. As an important component of U.S. GDP, accounting for nearly 70%, it plays a relatively stable role in driving GDP growth.
Ke Jing, an associate researcher at the Institute of International Studies of the Shanghai Academy of Social Sciences, said Americans will have mixed feelings when they see the Beige Book. The main reason is the situation in the labor market. On the one hand, employment is still very good, and the labor market is gradually moving towards a balance between supply and demand. This is an important support for whether the U.S. economy can finally achieve a "soft landing." But on the other hand, the Federal Reserve has maintained high interest rates for so long, and the inflation rate has never been able to complete the last "mile" from the 2% target range. Americans are also very anxious about PCE in April. This is also the "weird thing" about the current U.S. economic data - whenever the data shows that the U.S. economy is still very healthy and the labor market is thriving, the American stock market will fall. As long as there are no obvious signs of cooling in the labor market, the process of reducing inflation in the United States will continue to slow down. For Americans, this is a process of boiling a frog in warm water. The American people are now clearly resisting further price increases. Interest rates are high, and credit card bills are under great pressure. For businesses, costs are rising, profit margins are shrinking, and they are afraid that further price increases will eventually scare away consumers. Therefore, everyone is generally unhappy with the current economic situation in the United States.
Observers pointed out that this "unhappiness" may affect the votes of the Democratic candidate and US President Biden. Ke Jing said that Biden and the Democrats are particularly troubled by these data now, but they are helpless. The Biden administration can currently do very little on the economic front. On the supply side, although Biden has repeatedly called on companies not to increase prices, very few have responded. "Give money" to the people? It is a pity that the president does not hold the purse strings of the United States, and the Republicans must not oppose it and Congress should give the green light. Biden's words about "gift packages" had been released before, but in the end the money was not received, which only exacerbated people's dissatisfaction with his handling of economic issues. The serious loss of points on domestic economic issues is not good for Biden's election this year. The voters he is losing now are the people at the bottom of society who are most harmed by high inflation and high interest rates, including many Latino and black voters. In the 2020 election, they were an important force in Biden's victory.
Next week, the Federal Reserve policy meeting will be held. Although the PCE has cooled down, it is not easy to "expect" the Federal Reserve to make interest rate adjustments soon. At present, the market generally expects that the Fed will continue to remain on hold, with a probability of close to 100%, and the possibility of opening the door to an interest rate cut in September is less than 50%. For a long time, market expectations for interest rate cuts have fluctuated with the release of various data, sometimes optimistic and sometimes depressing. Ke Jing also does not think the Fed will cut interest rates in June. She said that all recent data in the United States reflect the arduous task of reducing inflation, that price pressures are still brewing, and that there are upward risks. The Fed still has to wait for more evidence that inflationary pressures continue to ease before it considers cutting interest rates. Judging from current data, this time point will not come soon. Economic performance in an election year has a significant impact on the current government and the ruling party. Against this background, political pressure on the Fed is likely to intensify. But in the face of such pressure, the Fed may become more cautious to maintain its independence and long-term credibility. In other words, even if interest rates are to be cut as soon as possible, there must be a basis. For example, if economic data shows some signs of weakness, even if it is not significant, it can cause controversy, then the Federal Reserve may slightly speed up the pace of interest rate cuts to support economic growth and employment.
