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【text/observer network columnist deng haiqing】

the federal reserve announced a 50bp rate cut at its september interest rate meeting, the first rate cut since the fed started this round of tightening cycle in march 2022. the fed's rate cut was in line with expectations, but the extent of the cut exceeded market expectations. the dot plot shows that the fed will cut interest rates by a total of 50bp this year.

1. the fed’s unexpected rate cut proves that the “mmt debt-driven prosperity” is unsustainable

the essence of biden's economics is a thorough "debt-driven prosperity." taking the ratio of m2/gdp in the united states since the 1960s as an indicator of monetary efficiency, it can be found that after 2019, especially since 2020, the gdp corresponding to the unit currency of the united states has dropped significantly, and the monetary efficiency has dropped significantly, corresponding to a decrease in production efficiency rather than an increase.

the apparent prosperity of the u.s. economy mainly relies on the substantial expansion of fiscal spending and deficits. the government leverages to stabilize economic growth, but it also leads to the rapid growth of government debt andqualcommonce the growth rate of government spending can no longer be maintained, the economy and employment will be "returned to their original state."

the unexpected rate cut shows that the fed is concerned about the us job market and the unsustainable snowballing expansion of government debt. the us unemployment rate in july triggered the "sam's law" - when the three-month moving average of the unemployment rate is 0.5% or more higher than the lowest point in the previous 12 months, the us economy will enter a recession. the number of new non-farm payrolls in august was 142,000, which was again far below the expected 160,000.

the fed's unexpected rate cut proves that the "mmt debt-driven prosperity" is unsustainable. the final destination of debt-driven prosperity is only zero interest rates or negative interest rates, nothing else. the trend of monetary policy universalism has collapsed, and neoclassical monetarism may return in a new way.

the lessons learned from the practice of the mmt fiscal deficit monetization policy in the united states will undoubtedly have a profound impact on china's current macroeconomic policy orientation.

2. the unexpected rate cut during the critical period of the us presidential election further questioned the independence of the federal reserve

since yellen, the fed's self-proclaimed independence has been increasingly questioned by the market. powell has also repeatedly succumbed to the political pressure of the ruling party to adjust monetary policy, with a strong "government official" color. for example, in early 2019, then-us president trump said that he had considered firing powell. so at the interest rate meeting in january 2019, powell immediately announced that the fed would suspend interest rate hikes and end balance sheet normalization at the end of 2019.

the us presidential election is currently at a critical stage. generally speaking, the federal reserve will not take radical actions at this time, thus highlighting its neutral stance. however, this unexpected rate cut means that the federal reserve, which has always claimed to be politically neutral in the past, has shown its support for the current ruling democratic party.

it is worth noting that this rate cut decision was not supported by all fomc voting members. federal reserve board member bowman opposed a 50bp rate cut and advocated a 25bp rate cut, becoming the first fed board member to vote against it since 2005. bowman's reason was that he was cautious about the slowdown in inflation and advocated a "gradual" reduction in the federal funds rate. but it should also be noted that bowman is a republican, nominated by trump in april 2018, and served as a fed board member in november 2018. the fed's meeting decisions rarely encounter objections, especially during powell's tenure as chairman. this disagreement may not only be a difference in monetary policy views, but also a reflection of the two-party political struggle in the fed.

the dot plot shows that the fed will cut interest rates by a total of 50bp this year, which is basically in line with market expectations. judging from powell's hawkish remarks after the interest rate meeting and the impact of the two-party struggle on the fed during the presidential election, it is unlikely that the fed will continue to cut interest rates quickly and significantly this year.

after the resolution was announced, the three major u.s. stock indexes hit new highs for the day and then turned down, indicating that the sharp interest rate cut has exacerbated market concerns about a u.s. economic recession.

from the perspective of historical rules, the fed's first interest rate cut in four years indicates that major problems have arisen within the u.s. economy, and a recession will be difficult to avoid, with a "soft landing" in doubt. the subsequent risk is that if the "soft landing" expectation deteriorates into a "hard landing," it could trigger an economic and financial crisis similar to that of 1929 and 2008.

3. competition among major currencies: rmb withstands continued impact of strong dollar

the world has been suffering from the strong dollar for a long time. in the cycle of us dollar interest rate hikes since 2022, the exchange rates of non-us currencies have generally been under pressure, and the japanese yen, korean won, and currencies of southeast asian countries have faced huge depreciation pressure, which once made the market worry that the asian financial crisis in 1997 would happen again.

historically, every time the federal reserve goes into a tightening cycle of interest rates, it will have a major impact on the world. countries with closer economic and financial ties to the united states will be more affected, and wall street capital will take the opportunity to "take advantage of the fire": during the tightening cycle in the early 1980s, the latin american sovereign debt crisis broke out; during the tightening cycle from 1986 to 1989, the japanese economic bubble burst; during the tightening cycle in the 1990s, the asian financial crisis broke out; during the tightening cycle from 2004 to 2006, the global financial crisis broke out.

however, this round of violent interest rate hikes by the us dollar ultimately failed to successfully harvest any major economy, which is an important manifestation of the weakening influence of the international monetary order dominated by the us dollar. as the federal reserve enters a cycle of interest rate cuts, china has withstood the game between china and the united states.trade warafter the technological war, the rmb once again withstood the continued impact of the strong us dollar. the rmb exchange rate and capital market have not lost control, the real estate financial risks have also been alleviated, the rmb's share of global payments has continued to increase, and the rmb exchange rate against the us dollar has reached a turning point.

china has withstood the super offensive of the us dollar currency war with great resilience. with the start of the federal reserve's interest rate cut cycle and the slowdown in us economic growth, the external pressure faced by china has been eased, and the room for autonomy in fiscal and monetary policies has increased. china can better "take itself as the main body" and promote high-quality development of the chinese economy, improve market expectations, boost market confidence, and be conducive to the stabilization and improvement of the macro economy and the stabilization and prosperity of rmb asset prices.

on september 19, the shanghai composite index, shenzhen component index and chinext index all closed in the green. the consumption, real estate and other sectors performed well, and the rmb exchange rate appreciated, indicating that investors' confidence in china's risky assets is recovering.

china's economy, capital market and real estate market are likely to come out of the trough in the fourth quarter and usher in a turning point. the us dollar index weakened, global capital flows reversed, and the geographical structure of asset allocation entered a new cycle. us dollar assets and rmb assets once again ushered in a balance point change, and "the rise of the east and the fall of the west" became possible. the most difficult period for rmb assets such as hong kong stocks, a shares, and real estate has ended, and long china is expected to become a new trend in global asset allocation.

4. the pressure to prevent risks has decreased, and time has begun to stand on china's side.

in the short term, the current economy and capital markets need to restore confidence, as well as correct the deviation of the government's behavior function. from the perspective of economic cycles, since joining the wto at the beginning of this century, china's economic cycle has often been ahead of the united states. therefore, after the federal reserve's unexpectedly large interest rate cut, china's macroeconomic policy adjustment and optimization has greater room and faster pace in terms of magnitude and rhythm.

after internal and external macro-risk pressures are controlled and alleviated, the restrictive policy measures previously designed for risk prevention are expected to be relaxed, so as to better stimulate market vitality and the enthusiasm of all parties.

(this article only represents personal views, not the views of the institution where it is located, and does not constitute investment advice.)

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