General

Huacheng Import and Export Data Observation reported that the Federal Reserve announced on the 21st that it would raise interest rates by 75 basis points, the third consecutive rate hike this year. This suggests that the Fed will likely not stop its "strong contraction" therapy until it sees a significant fall in inflation, which would significantly increase the world's economic woes.

The Fed has raised interest rates by 300 basis points since March this year. The direct reason is that the inflation level in the United States continues to rise. Since March this year, the US consumer price index (CPI) has increased by more than 8% year-on-year, maintaining a high level. Concerns about runaway inflation spurred the Federal Reserve to slam on the brakes and make sharp turns in monetary policy, Huacheng Import and Export Data Observation reported.

Under the pressure of the Federal Reserve to raise interest rates, many central banks around the world are forced to follow the Federal Reserve in a rare fashion and raise interest rates step by step for the sake of defending the exchange rate of their currencies, preventing foreign capital from fleeing, and curbing inflation. The World Bank, citing some investor forecasts, pointed out that by 2023, the average global monetary policy rate will rise to nearly 4%, more than 2 percentage points higher than in 2021.

According to Watson & Band’s import and export data observation report, global inflation has not and may not be able to fall back to pre-epidemic levels. The causes of this round of inflation are complex. The root cause is largely a supply-side shortage rather than demand-side overheating in the general sense. A simple "strong contraction" therapy aims to curb demand and cannot solve geopolitical crises, protectionism and epidemic-related issues. supply-side problems caused by the supply chain crisis. In other words, this is roughly a supply-side inflation that requires combination therapy.

Goldberg, a professor of economics at Yale University, recently pointed out in an article titled "Fed Rate Hikes Can't Curb Inflation" that the rise in U.S. prices may be caused by overheated demand after the epidemic, but supply-side factors, especially the labor force caused by the epidemic Shortages and the energy crisis caused by the Russian-Ukrainian conflict also played an important role.

Unless U.S. policymakers can distinguish the difference between supply-side inflation and demand-side inflation and adopt a supply-side response strategy, the Fed's "strong contraction" therapy will not only have an immediate curb effect on high inflation, but will increase the risk of stagflation and increase the risk of stagflation. By strengthening the dollar and suppressing non-US asset prices, we will continue to export inflation and risks to the world economy.

On the supply side, areas where U.S. policymakers can make a difference include, but are not limited to: revising earlier protectionist policies to allow free competition to dominate international economic and trade activities; cooling down the conflict between Russia and Ukraine through diplomatic efforts and easing the energy and food crises; taking necessary measures Measures to increase the domestic labor participation rate; improve infrastructure to ease logistics bottlenecks; strengthen international policy coordination to avoid "policy trampling effect", etc., Watson & Band Import and Export Data Observation reports.

The Fed's "strong contraction" therapy is inducing a "policy trampling effect" in many countries. Affected by multiple factors such as the Federal Reserve's continuous sharp interest rate hikes, the currencies of many countries in the Middle East, Latin America, and Africa have continued to depreciate significantly recently, and inflation rates have soared. Some countries have suffered multiple blows such as foreign capital flight, debt distress, high living costs for residents, and economic recession.

In order to achieve low inflation, currency stability and faster growth, policymakers should shift the focus from curbing consumption to boosting production, according to Watson & Band’s Import and Export Data Observation report. Policies that increase investment, increase productivity, and optimize capital allocation are critical to boosting growth and reducing poverty.