At present, there are some similarities between the US economy and the period of "great stagflation" in the 1970s-1980s. The market is worried that the Federal Reserve's radical interest rate hike will trigger the US economic recession, which can be seen from the rapid flattening of the US bond yield curve or even a short upside down. However, we believe that there is an important difference between the current US economy and the era of "great stagflation", and the risk of US economic recession during the year is relatively limited. There are five reasons:
1. US economic growth is resilient. At present, the degree of "overheating" of the US economy in this round is lower than that in the 1970s-1980s. The year-on-year growth rate of the US real GDP has not exceeded the potential growth level, and it is still in the stage of "recovery" after the epidemic. In particular, the US job market is far from "stagnant". The current US unemployment rate is 3.6%, which is significantly lower than the 4.4% natural unemployment rate estimated by CBO in 2022. The US economy may be able to withstand multiple interest rate hikes without falling into recession.
2. The US consumption structure is "rebalancing". The US inflation structure is leaning towards the "demand factor". With the Fed tightening, excess demand (especially durable goods and home purchase demand) is expected to be effectively restrained. Service consumption is relatively insensitive to the Fed's interest rate hike, and the cooling of inflation can also help repair the demand suppressed by excessive prices in the early stage. The negative impact of the Fed's tightening on economic growth may be controllable.
3. The supply shock is expected to improve during the year. The US energy dependence is far lower than that in the "stagflation" period of the last century, and the proportion of us energy expenditure in GDP has decreased from more than 10% to about 6%. After the shale oil revolution in the United States in 20082014, American oil products were in a state of "self-sufficiency". US oil companies are expected to accelerate production this year. Supply chain bottlenecks in the United States are expected to improve significantly during the year.
4. The US fiscal decline helps ease inflation. In fiscal year 2022, the US fiscal expenditure budget will decrease by US $1.2 trillion month on month. Structurally, the proportion of "employee compensation" in the total income of U.S. residents has rebounded to the pre epidemic level, and U.S. consumer demand may not be excessively cooled. In addition, fiscal stimulus is easier to exit than monetary policy, the leverage ratio of American residents has not increased significantly, and the financial risk is more controllable.
5. US inflation expectations remained relatively stable. The Cleveland fed model shows that the ten-year inflation expectation of the United States in March 2022 is only 1.9%. Michigan residents' one-year inflation expectation is significantly lower than the spot CPI inflation rate. Inflation expectation (rather than inflation itself) is the core factor of residents' wage pricing, and then the wage inflation spiral pressure can be controlled. Stable inflation expectations also give monetary policy greater flexibility.
Looking forward to the range and impact of the Fed's interest rate hike in 2022: the US inflation trend may be "high before low": the inflation pressure is high in the first half of the year, but in the second half of the year, with the "double tightening" effect of money and finance, the rebalancing of US consumption structure and the easing of supply shock, the US inflation pressure is expected to weaken. The pace of monetary tightening of the Federal Reserve may be "fast before slow after": in the first half of the year, it may raise interest rates by 100 or 125bp in total, but if the inflationary pressure in the United States eases in the second half of the year, the Federal Reserve may moderately slow down the pace of tightening. The Federal Reserve may start to shrink the table in May. The effect of the "interest rate increase + table contraction" combination remains to be seen. There may be a substitution relationship between the table contraction and the interest rate increase. It is estimated that the US federal funds rate may rise to about 2% in 2022 and will not reach the restrictive level of more than 2.5% for the time being. Since 1994, the Fed has never raised interest rates by more than 200bp in a year. In the process of the Fed's rapid interest rate hike, the flattening and even upside down risk of the US bond yield curve, the risk of financial market volatility, and the pressure of capital outflow faced by emerging markets deserve special vigilance.
