Fed Response: 6-10 Interest Rates In The Next Three Years

The world may enter the era of strong US dollar, intensified financial turmoil and upward inflation.

For China, the RMB exchange rate market reform or breakthrough in 2018, the next three years, the currency is difficult to relax significantly, Sino US friction or accelerate the pace of China's reform and pformation.

What opportunities and challenges will the core of Trump's economic policy bring to China?

The Trump administration's economic policy mainly includes fiscal stimulus, reducing trade deficit, tightening immigration policy and reducing regulation and regulation, so as to achieve the purpose of revitalizing manufacturing and employment in the United States.

On the whole, the new deal will push up US inflation, making the United States 6-10 times in the next three years or raising interest rates, and the world may enter the era of strong dollar, financial turbulence and inflation center moving upward.

For China, there will be breakthroughs in the market reform of RMB exchange rate or in 2018, in the next three years.

It is difficult to relax significantly, Sino US friction or accelerate the pace of China's reform and pformation.

What opportunities and challenges will the core of Trump's economic policy bring to China?

Based on the current US economic situation and the Trump administration's core policy, we expect the United States to increase interest rates by 6-10 times in the next three years, thus making the target rate of US federal funds return to 2-3% level.

From the perspective of rhythm, 2016 is a year plus, 2017 may be half a year plus, 2018 may start a quarter plus once.

With the acceleration of US interest rate hike, we maintain the judgement of a strong US dollar cycle.

The risk is that if the dollar is too strong, it will offset the US fiscal stimulus and may raise interest rates less than we expected.

After the Second World War, there were three recoveries over the past 5 years. There were two common characteristics in the latter three recovery stages:

First, the middle and late stages of recovery.

Speed up.

At the beginning of 1961Q2~1969Q4:1968Q1, inflation began to accelerate in the United States, and CPI grew rapidly to 6% of Q1 in 1970.

In 1983Q1~1989Q3:1987 Q2, inflation pressures began to appear in the United States, and CPI climbed from 2% to 6% in 1990.

At the end of 1992Q2~2000Q4:1999, inflation pressure began to appear in the United States, and CPI rose from about 2% to about 3.4% in 2000~2001.

Second, interest rate hikes are strong and interest rates are rising fast.

In 1968, the US federal funds rate continued to rise, rising from 4% to about 9.2% in 1970, rising by more than 5 percentage points.

Starting in 1987, the US federal funds rate continued to rise, from 5.9% to 9.8% in 1989, an increase of nearly 4 percentage points.

In 1999, the federal interest rate rose from 4.75% to 6.5% in 2000, rising by nearly 2 percentage points.

Although the US economy has recovered slowly, the unemployment rate and inflation have reached the long-term goal of the Federal Reserve.

The current overall situation of the US economy is relatively strong employment and consumption, while corporate investment is weak.

Since the subprime mortgage crisis, the contribution of us personal consumption to GDP has continued to rise, which has been negative for 2007-2009 years, 1.0-1.5 percentage points in 2010-2013 years, and increased to 2.0-2.5 percentage points in 2014-2016 years.

This is attributed to

And the wealth effect of rising housing prices, as well as the rising consumption capacity caused by the continued decline in the unemployment rate.

In addition, the latest inflation figures show that the US CPI increased by 2.1% in December, the highest level in two and a half years, and CPI has been increasing for five consecutive months.

With the US economy approaching the dual goals of full employment and price stability of the Fed, the Trump administration's policy is expected to further accelerate the improvement of US manufacturing industry and accelerate the rise of price pressures. We expect the fed to raise interest rates 6-10 times in the next three years.

At present, the Fed does not increase interest rates more because the Fed officials are convinced that the US economy is strong enough to deal with any uncertainty.

However, the chairman of the Federal Reserve has recently pointed out that waiting too long on the issue of raising interest rates may force the Federal Reserve to increase interest rates more radically.

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