Experts warn of a recurrence of the global financial catastrophe.
The Federal Reserve System meeting this week was devoid of surprises; the US base rate remained constant, despite the fact that some observers expected it to rise. Despite this, the markets responded warily to Chairman Jerome Powell's remarks. Stock market quotes decreased practically everywhere, while the dollar rose. What precisely did American central bankers tell the globe, and why is this issue critical for the whole global economy in the coming year - in Izvestia material.
Investors were in a good mood before to the meeting of the committee on open markets. American indexes increased by more than 2%, the Russian stock exchange recovered from geopolitical concerns, and cryptocurrencies recovered following a three-day slump. However, following Powell's release to the press, the tone quickly shifted to the reverse.
The Fed's chairman has stated that it is not yet appropriate to hike interest rates. Furthermore, he stated that "tapering," or the halt of the Fed's asset purchases (which the system has been doing for the previous two years), will begin in March. One piece of positive news for markets and the economy, and one piece of bad news, but both were already priced in. However, there were certain utterances that could only be compared as an ice shower.
First, the Fed initially planned three or four rate increases (in standard increments of 25 basis points, or 0.25 percentage points). Powell stated that the interest rate can be hiked at any time throughout the year. This suggests that there might be five or perhaps six such hikes before the end of the year. Furthermore, the chairman avoided addressing the question concerning the next step in the rate's rise, implying that it may potentially exceed 0.5 percentage points, as has happened previously.
Second, Powell opened for the potential of not just ceasing asset purchases, but also beginning to sell them off. This is far more severe. The federal government currently has about $9 trillion on its balance sheet, the vast majority of which was obtained via successive rounds of "quantitative easing" that began in 2008. This is a massive canopy that, sooner or later, will have to be removed because it is unclear what to do with it. Of course, selling everything at once is impossible, but even selling a tiny portion of these fairly hazardous stocks might have unanticipated and unfavourable implications.
According to Goldman Sachs, the rate of sales might reach $100 billion per month by the middle of the decade, reducing the Fed's balance sheet to a more or less acceptable $6 billion, or roughly 25 percent of US GDP, compared to over 40 percent presently.
Why is the Fed willing to go to such lengths? It's all about the American economy overheating. GDP increased by 6.9 percent year on year in the fourth quarter, and by 5.7 percent for the whole year. This is the highest reading since 1984. However, such a speedy recovery was enabled, first, by the consequence of a low base following a huge decrease in 2020, and second, it is substantially over the long-term prospective indication of 2%. Inflation, which surpassed 7% at the start of this year - the highest level in 39 years - confirms the unjustification of such rapid development. Overheating is clearly accompanied by record low unemployment and rising inflation.
How does the evolution of Fed bankers into hardened monetary hawks endanger the global economy?
"Too substantial tightening of the Fed's monetary policy (which is not yet predicted) can lead to a collapse in financial and commodities markets, defaults in the global economy's "weak links," and a likely recession, according to Olga Belenkaya, Finam's head of macroeconomic analysis. According to her, the global financial crisis of 2008 was precipitated by the US housing crisis, which was predicated on excessive family debt, financial institution deregulation with extensive securitization of home loans, and unethical risk-adjustment techniques.
The Fed's fast tightening cycle triggered the crisis, with interest rates rising from 1% in 2004 to 5.25 percent in 2006.
According to the expert, such a large rate hike currently appears unrealistic for financial security reasons - at the present, the market anticipates the Fed rate to be in the range of 1-1.25 percent by the end of this year, and 1.75-2 percent by the end of 2023. This is still rather loose monetary policy, as the rate is projected to be below the long-term neutral level (2.5 percent), especially given the present level of inflation of 7 percent.
According to Anton Tabakh, head economist at Expert RA, tighter US financial policy is unlikely to result in a fresh crisis because regulators' watchword has long been "moderation and accuracy."
"Raising rates quicker than previously imagined is more plausible, but a 1.25 percent rate with a predicted inflation rate of 4% is exceedingly low, particularly for people who recall life before 2008, when ultra-low rates were the norm." The $100 billion balance sheet reduction appears overvalued, with correct sales of $10-20 billion and redemptions of securities in the Fed portfolio of $30-40 billion each month more realistic. And everything will be done with the financial markets in mind.
The scope and character of monetary policy adjustments currently are not the same as they were in 1979 or 2008, and the purpose of all efforts is to "play off" inflation, averting a catastrophe, according to the expert.
Nonetheless, he believes that Russian markets may also be affected by the distribution, owing to a likely drop in export prices.
"Previously, they tended to decline when the dollar gained and interest rates climbed, but the market is currently being influenced by different forces." Geopolitical risks have a much greater negative impact on markets in general - both stocks and bonds - than a 1.25 percent increase in the cost of funding per year: our Central Bank has greatly increased rates, and now OFZ rates are so much higher than in American and European securities (and significantly higher than local inflation) that an increase in US rates will have little effect on the Russian economy.
The primary dangers of financial tightening, according to Belenkaya, are connected to the fact that the quick phasing out of monetary incentives and higher rates in developed countries may raise volatility in commodities and financial markets and lead to temporary outflows of capital from risky assets.
Extremely advantageous conditions for financial markets will begin to shift in 2020-2021, with the massive flood of liquidity that "lifted all boats" being replaced by its decline. And this may be sensitive in light of the asset market's strong rise over the preceding two years, as well as the global debt load reaching record levels in 2020 for the first time since World War II. Developing economies, particularly those with a high degree of foreign currency debt, may be particularly vulnerable to the process.
However, an Izvestia interlocutor noted that these risks apply to Russia to a lesser extent than to other similar countries because Russia's total external debt is less than international foreign exchange reserves, and the country has a record current account surplus, low public debt, and high interest rates on ruble assets. Increased capital outflows from developing economies may have an impact on Russia, but the country is now much more vulnerable to geopolitical issues.