Some News in the Financial Market: 04/03/2024 – 10/03/2024
Some News in the Financial Market: 04/03/2024 – 10/03/2024
Writer: Klinsmann Lee
US Fed is taking a precautionary approach to interest rates cuts [1]
Background:
United States Federal Reserve Chair, Jerome Powell, said in an interview that the Fed is not in a rush to cut interest rates.
The Fed wants inflation to move sustainably towards a 2% target before lowering its interest rate.
Despite the policy interest rate staying high, the economy and labour market have performed strongly, allowing the Fed more time and room to act cautiously.
The US Fed believes that policy rates are at their peak.
Klinsmann’s Analysis:
I believe the US Fed approach is reasonable. Taking a precautionary approach to erasing policy interest rates allows the Fed to see a more sustainable drop in inflation before taking action.
The risk of high inflation poses an overall threat to the economy and the Fed must gain a level of confidence to lower inflation expectations before cutting interest rates.
The strong performance in the US economy and financial market also gives room for the Fed to keep interest rates at the current level.
The current policy rate, around 5%, also gives room for the US Fed to cut interest rates rapidly when needed to counter any negative economic shocks.
However, optimism breeds confidence and sometimes overconfidence.
China sets 2024 GDP growth target of around “5%” [2]
Background:
For 2024, China has set a Gross Domestic Product (GDP) growth target of 5%. In 2023, China achieves a 5.2% growth in GDP, meeting its target of 5%.
China will also issue 1 trillion yuan “ultra-long” special treasury bonds “to fund major projects aligned with national strategies”.
China also plans for an unemployment target rate of 5.5% and a Consumer Price Index (CPI) increase of 3%.
Klinsmann’s Analysis:
With the unemployment rate averaging 5.2% in 2023, I believe that the 2024 unemployment target rate is largely achievable.
However, the CPI target is hard to achieve given that China overall is facing a deflation situation (see last week’s “Some News in the Financial Market”).
With a shift in attitude, we can also see that policymakers are focused on managing and controlling downside risks rather than focusing on growth.
This is understandable as China’s economy faces various threats such as weak consumer and business confidence, deleveraging within the real estate sector and deflation.
At the same time, I can also see financing pressures for local governments given that these local governments rely on land sales to developers to generate revenue.
A gloomy outlook with a glimpse of light – this is expected when the economy is in a stage of deleveraging.
I think the overall economic approach taken by China’s government in 2024 is best summarised by the following quote in the article “We will implement a package of measures to defuse risks caused by existing debts and guard against risks arising from new debts”.
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