DDN Business Insider | Experts warn about existing uncertainty as Fed seen poised for interest rate cut
Editor's note: On the evening of August 23, Federal Reserve Chairman Jerome Powell spoke at the Jackson Hole annual meeting, expressing increased confidence that U.S. inflation will return to the 2% target. This statement has been interpreted by the public as an indication that the Fed will begin cutting interest rates in September. What impact will the rising expectations for interest rate cuts have on the global economy?
【Anchor】Hello everyone, welcome to DDN Business Insider. I am Yunfei Zhang. On the evening of August 23, Federal Reserve Chairman Jerome Powell spoke at the Jackson Hole annual meeting, expressing increased confidence that U.S. inflation will return to the 2% target. This statement has been interpreted by the public as an indication that the Fed will begin cutting interest rates in September. What impact will the rising expectations for interest rate cuts have on the global economy?
To discuss this topic, we have invited Ren Libing, founder and president of Beijing Yuanda Investment Co., Ltd.and well-known investor, Qin Tai, assistant director of the research institute at Huajin Securities, chief analyst of macro and financial real estate, and Dr.Ma Yaozong, assistant professor at the School of Art and Social Sciences at Hong Kong Metropolitan University, to provide insights and analysis. Welcome, everyone!
【Anchor】We have seen that, after Powell's "dovish statement", a 25 basis point rate cut in September has almost become a market consensus, with some expecting the cut to reach 50 basis points. Powell himself however stated that the timing and pace of rate cuts will depend on data, outlook, and risk balance. So, first, I would like to ask Ms.Ren, in your view, what will the rate cut magnitude be in the current context? Are there any unexpected variables?
Based on the current situation, although the market's expectations for a rate cut by the Fed in September are steadily rising, with some even predicting as high as 50 basis points cut. However, considering various factors, it may not reach such a high magnitude.
Federal Reserve Chairman Jerome Powell has also stated that the timing and pace of rate cuts will depend on the data outlook and the balance of risks.
Economists at Bank of America believe that the Fed's focus on cooling the U.S. labor market will still call for a 25 basis point rate cut in September, rather than 50 basis points.
They argue that Powell's dovish statement does not open the door for a 50 basis point cut, but rather support a gradual reduction in rates.
Of course, there is also another viewpoint in the market, suggesting that while the U.S. is continually raising our expectations for rate cuts, it might not only refrain from cutting but could even raise rates, thereby exacerbating our contradictions.
However, this is quite extreme, and we hope it does not occur.
【Anchor】Yes, in this situation, Mr. Qin, do you think there will be a rate cut exceeding market expectations in September?
This round of rate-cutting has effectively become a foregone conclusion. However, since the pandemic, the Fed has shifted to a delayed decision-making framework based on recent data rather than future forecasts. Powell has emphasized in his remarks that the timing and pace of rate cuts will depend on the continuously changing outlook of future data and the balance of risks.
This means that if unemployment and inflation data fluctuate in the coming months, the Fed is likely to adopt a more conservative initial rate cut. This also gives Powell a two-way fallback option, considering his previous experience of both excessive rate hikes and excessive easing during his tenure.
【Anchor】However, there are still differing opinions in the market regarding the impact of rate cuts. For example, some believe that rate cuts could lead to asset bubbles and the accumulation of financial risks. regarding the potential negative impacts of rate cuts, Ms. Ren, how do you assess this? What effective measures can be taken to mitigate these negative effects?
Rate cuts may indeed lead to issues of asset bubbles and the accumulation of financial risks. Balancing the relationship between rate cuts and financial stability requires a multifaceted approach.
First, regulatory authorities should strengthen their oversight of financial markets, closely monitoring changes in asset prices and taking timely measures to curb any signs of potential bubbles. This can include adjusting macro, being prudent about policies, and setting requirements for banks’ capital adequacy ratios and lending standards to prevent excessive borrowing and speculative behavior.
Second, the formulation of monetary policy needs to be more flexible and precise. Rate cuts should not be made blindly just to stimulate the economy. Instead, they should be based on the actual economic situation, the need for financial stability, as well as the determined extent and pace of rate cuts accordingly. Alongside rate cuts, other policy tools, such as open market operations, should be employed to adjust market liquidity and avoid excessive capital flowing into specific sectors, which could create bubbles.
Third, it is important to guide funds towards the real economy. Through policy guidance and incentives, financial institutions should be encouraged to direct funds toward projects and enterprises that have actual economic value, thereby promoting the development of the real economy.
【Anchor】Okay, we also noticed that recently some well-known industry insiders have stated that U.S. rate cuts could prompt Chinese companies to sell off $1 trillion in dollar-denominated assets, which could potentially push the yuan to appreciate by up to 10%. Ms. Ren, do you think that a cut in U.S. rates will lead to a significant return of dollar assets to the Chinese market?
The trend of the RMB exchange rate is influenced by a variety of factors, not just the asset sell-off behaviors of Chinese companies. The international economic situation, global capital flows, China's economic fundamentals, trade conditions, and monetary policy all play significant roles in affecting the RMB's exchange rate.
Moreover, the People's Bank of China will, based on market conditions and the needs of economic development, implement corresponding monetary policy and exchange rate management measures, in order to maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.
Regarding whether a rate cut by the U.S. will lead to a significant inflow of dollar assets back into the Chinese market, there is a possibility, but the specific scale and impact are difficult to estimate accurately.
As mentioned earlier, changes in interest rate differentials can affect the flow of capital, but at the same time, the economic conditions, investment opportunities, and market risks in other countries and regions can also influence international capital decisions.
【Anchor】Yes, Mr. Qin, how do you see it?
The broad economic policy mix currently adopted by the U.S. government is very rare in history.
It may lead to a long-term upward shift in U.S. wages and inflation, while at the same time, the ten-year Treasury yield remains below 4%.
As a result, after each round of quantitative easing (QE), the transmission efficiency of the U.S. yield curve from short to long-end has experienced significant losses.
This will greatly weaken the actual restrictive level of the current policy rate set by the Fed, potentially leading to a higher endpoint for this round of rate cuts compared to previous cycles.
Considering the slowdown in U.S. labor supply and the underlying change of employment, there may be a reinforcement of the continuously strong consumer demand.
We expect that the U.S. employment and core inflation data for August may fluctuate toward the tighter direction.
Additionally, with the European Central Bank and the Bank of England accelerating their rate cuts, while the Bank of Japan is considering a high probability of pausing tightening due to the weak domestic demand. The global financial markets may reprice the U.S. dollar index by that time.
We still anticipate that the Fed will cut rates by 25 basis points in both September and December.
If the dollar returns to a high level, the possibility of external pressure on our country's monetary policy cannot be ignored.
【Anchor】Yes, Ms. Ren, what directions would you recommend investors focus on under this context?
First, in the real estate sector, a decrease in interest rates will lower mortgage rates, easing the burden on homebuyers, which in turn stimulates housing demand. This can contribute to the activity of the real estate market and the stable increase in housing prices, potentially boosting the sales and performance of real estate companies.
Second, in the financial sector, banks and other financial institutions may benefit from the increased market liquidity and borrowing demand brought by the interest rate cut. Interest income and business volume may increase.
At the same time, the securities market may also perform actively due to the easing of liquidity, and the business of related financial institutions such as brokerage firms is expected to grow.
In the consumer sector, a decrease in interest rates will increase consumers' disposable income, potentially enhancing their willingness to spend. This is positive for consumer industries such as retail, dining, and tourism, which may see growth in revenue and profits for businesses in these sectors.
【Anchor】Okay. The impact of strong interest rate cut expectations on the Hong Kong market is also a topic of great concern. Generally speaking, expectations of rate cuts should help to revive the Hong Kong property market. However, according to the latest data released last week, the private residential price index in Hong Kong for July reported 296.8 points, a month-on-month drop of about 1.88% from June’s 302.5 points, hitting an eight-year low since October 2016. Dr. Ma, do you think this indicates that the expectations for rate cuts have not had a substantial effect on the Hong Kong property market?
Recently, during meetings, they mentioned what the implications of interest rate cuts might be. It seems that there has not been a significant impact on the Hong Kong property market. I think the first reason is that the pace of interest rate cuts may not be as optimistic as everyone expected.This is first.
The second point is whether a rate cut in the U.S. means that we in Hong Kong will also need to cut rates, which may not happen immediately.
In fact, although Hong Kong and the U.S. have a pegged exchange rate that influences the interest rates there are other factors that can cause differences or discrepancies between the interest rates in the two regions.
Looking at Hong Kong's recent situation, banks seem to be more cautious about lending or rather are not as willing to lend as before. This reflects that the banking sector may not have sufficient funds, which limits the space for significant interest rate cuts.
You can see that our deposit rates are quite high, and banks have little profit margin. Currently, the interest rates for property loans we are currently dealing with might peak around 4.125%, which is very close to the deposit rates.
If our deposit rates are not reduced to provide banks with some profit margin, it is unlikely that the interest rates for bank loans will drop quickly.
Therefore, it appears that the expectations for interest rate cuts in the U.S. have not had much impact on our property market.
【Anchor】Yes, how do you view the buying and leasing market in Hong Kong's property sector for the second half of the year?
Since the factor of interest rate cuts is not favorable, it is possible that the property market in the second half of the year will not have much room for increase and may remain relatively stable or even experience a slight decline.
The main reason, I believe, first, depends on how much potential supply there is in Hong Kong. Over the next three to four years, we may have around 100,000 (units) of potential supply. In fact, looking at the past year, when developers were selling new residential units, they have priced them at relatively low prices.
Often, the price difference between the first and second phases of the same project can be around ten percent. In such a situation, if developers continue to sell their properties at lower prices, it is foreseeable that the property market in the second half of the year will still face pressure.
However, the rental market may perform better in the second half of the year, especially as there are many seasonality factors at play. For example, an increase in students coming to Hong Kong for study will create significant demand in the rental market. Therefore, we anticipate that rental prices will slowly trend upward in the second half of the year.
【Anchor】You mentioned that the Hong Kong property market might still face pressure in the second half of the year. Besides the rate cuts not meeting expectations, what other reasons do you think will contribute to this situation?
Hong Kong has shown a relatively negative trend in its property prices over the past year, even though the government may have reduced some stamp duties and taxes. I believe the reason for the continued decline in property prices is related to the selling strategies of the developers.
In the past year, developers have been selling their new properties at relatively lower prices, possibly due to pressure from their funds or their pessimistic outlook on the market. Given the high supply, if demand does not keep up, it is possible that the trend of property prices in the second half of the year will not be very optimistic.
【Anchor】OK, thank you. That's all for this episode. Remember to follow us on YouTube or download our APP. I'm Yunfei Zhang, thanks for watching, and see you next time.
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