The Fed's interest rate hike and table contraction are the core trading logic of overseas markets this year, and they are also important external constraints on China's policies and asset trends. We launched a series of Fed tightening reports to systematically sort out the previous tightening process and market impact since the 1980s.
The first part reviews the basic situation of previous interest rate increases. Over the past four decades, the Fed has raised interest rates six times, including the famous Volcker against inflation in the 1980s. These interest rate cycles are rich in types, including high inflation caused by supply side pressure, bubble pressure generated by real estate and stocks, and normalization process after the implementation of unconventional policies.
1.1983.3-1984.9: oil supply shocks superimposed, policy objectives blurred, and the United States entered a vicious cycle of stagflation. After taking office as chairman of the Federal Reserve, Volcker took controlling inflation as the core goal, implemented a tough tightening policy, strictly controlled the monetary increment in the early 1980s, and then turned to raising interest rates.
2. From January 1987 to July 1989: inflation control has gradually become the policy goal of the Federal Reserve, and the Taylor rule has been gradually introduced to clarify the positive relationship between high inflation and interest rate increase. During this period, the dollar depreciated and inflation rose. The Federal Reserve responded by raising interest rates.
3.1994.2-1995.2: the economy and stock market rebounded rapidly after the recession, showing signs of overheating. Subsequently, the Fed raised interest rates faster than the market expected, and the bond market was volatile. During this period, the Fed began to increase the guidance of inflation expectations.
4. June 1999 to May 2000: the Federal Reserve cut interest rates in response to the Asian financial crisis. In June 1999, the Federal Reserve decided to withdraw its monetary policy easing policy and began to raise interest rates, followed by the collapse of the science and technology network bubble.
5. June 2004-june 2006: in 2001, with the recession caused by the sharp decline of the stock market, the Federal Reserve cut interest rates sharply. Since then, economic recovery and rising housing prices have led to worries about asset bubbles, and the Fed has begun to raise interest rates again.
6. From December 2015 to December 2018: after the long-term zero interest rate and QE policy, the Federal Reserve began the process of monetary policy normalization. The pace of interest rate increase in the early stage was cautious, and it was significantly accelerated or even radical in the later stage. The degree of hawkism is much higher than the market expectation.
Which year is this round of interest rate hikes more like? The characteristics of supply shock, soaring prices, overheated demand and policy normalization seem to be presented in this round of interest rate hike cycle. The initial stage may be most like 2004. The speed of short-term interest rate hike will not be slow, but the rhythm of the second half of the year is still uncertain. The damage of the supply chain and the rise of energy prices have something in common with the 1980s; Price growth has reached a new high in the past few decades, and the Federal Reserve is forced to respond, which is similar to cooling house prices in 2004; Under government subsidies, consumption is hot and the stock market has soared, which is similar to the overheating on the eve of 2000; Finally, from the perspective of policy normalization, we cannot escape the characteristics of 2015. In the short term, as the core demand of the Federal Reserve is to curb inflation expectations, which is relatively consistent with the environment to deal with the overheating of the real estate market in 2004, we judge that the short-term interest rate increase is likely to be carried out quickly. However, the rhythm of the second half of the year still depends on the marginal changes of the above problems.
The Fed's interest rate hike and table contraction have become the core trading logic of overseas markets this year. At the same time, they are also important external constraints affecting China's policies and asset trends. To this end, we launched a series of Fed tightening reports to systematically sort out the tightening process and market impact since the 1980s, so as to provide reference for judging the trend of this year. The first part of the series briefly reviews the basic situation of previous interest rate increases, including the background, economic and financial situation and policy considerations.
Over the past four decades, the Fed has raised interest rates six times, including the famous Volcker against inflation in the 1980s. Since the 1980s, the Fed has raised interest rates for six significant cycles, namely, 1983-84, 1987-89, 1993-95, 1999-00, 2004-06 and 2015-17. From the 1970s to 1980s, the US monetary policy was in a period of fierce changes, with Keynesianism, monetarism and rational expectation theory leading the way. In order to deal with the long-term stagflation, Federal Reserve Chairman Volcker implemented a firm monetary tightening. In the 1990s, the fear of high inflation was completely relieved. The Fed's monetary policy under Greenspan was mainly based on the Taylor rule to adjust the economic cycle and inflation. From the late 1990s to the 21st century, the global financial market was in constant turmoil. In previous crises, the central bank and the US Federal Reserve actively cut interest rates, and the subsequent interest rate increase cycle was mainly the withdrawal of easing policies in the previous crisis. In 2015, the Federal Reserve under Yellen implemented the normalization of monetary policy after the global financial crisis and the Great Recession subsided. In 2020-21, the degree of global monetary easing was unprecedented in the history. At present, the United States is facing a strong economic recovery and inflation hitting new highs. The market has strong expectations for the Federal Reserve to raise interest rates continuously and rapidly.
These interest rate cycles are rich in types, including high inflation caused by supply side pressure, bubble pressure generated by real estate and stocks, and normalization process after the implementation of unconventional policies. Due to the complexity of the current interest rate hike cycle, which almost simultaneously includes multiple factors such as high inflation, supply chain rupture, economic downturn, high stock prices and house prices, the above interest rate hike history has valuable reference information.
