Neal Kimberley
In the United States, the pressure is on the Fed to act in the face of rising prices. The US consumer price index hit 7.5 per cent year on year in January, its highest annualised increase since February 1982. That’s a pretty uncomfortable statistic for the Fed and the Biden administration which had both, until recently, sought to characterise upwards US inflationary pressure as transitory.
Fed policymakers who had previously been inclined to “look through” evidence of rising prices now exhibit a pressing need to respond aggressively to those selfsame inflationary pressures.
Markets are not stupid and so have priced in the likelihood that the Fed will front-load interest rate hikes in an attempt to suppress those aspects of higher US inflation that can be influenced by tighter monetary policy. A succession of US rate hikes in 2022 are now baked into market expectations and a Fed hike in March is now surely a certainty, the only question being whether the US central bank will opt for an increase of 0.25 percentage points or throw caution to the wind and tighten by 50 basis points.
Over in China, partly driven by the country’s continuing zero-tolerance approach to containing Covid-19, the People’s Bank of China’s monetary policy stance remains aimed at crafting conditions that keeps the pace of Chinese economic growth on track. Indeed, the PBOC eased monetary policy last month.
In part, the inflationary pressure the US is presently experiencing is a direct consequence of decades of US offshoring of production to China, production that has been materially disrupted by Beijing’s zero-Covid policy.
From this perspective, the best thing for the Fed would be for the Chinese economy to get back into top gear. If not, presumably, a succession of US rate hikes will only realistically influence that segment of higher US inflation unrelated to global supply chain dislocations.
In this scenario, moving hard and fast might make good sense to the Fed in its attempt to curb US inflation, but it’s not necessarily a winning formula. Unless global supply chains normalise, it could end up negatively impacting US economic growth prospects and ultimately it may not enhance the allure of the greenback.
Fortunately for the Federal Reserve, help could be at hand from a Chinese economy that may be stirring. New bank lending in China in January rose 11.5 per cent year on year in January to 3.98 trillion yuan (US$626 billion), more than three times the December figure of 1.13 trillion yuan, data released by the PBOC last week showed.
As Iris Pang, chief economist for Greater China at Dutch bank ING, pointed out: “Most of the loan growth came from corporate longer-term loans.” Even allowing for the fact that Chinese banks tend to book loans at the beginning of the year, “this year’s jump is significant even on a year-on-year basis”.
Supportive PBOC monetary policy combined with buoyant new bank lending may prove to be the boost the Chinese economy needs, zero-Covid policy or not.
That might anyway lead investors to see renewed value in renminbi-denominated investments, but it could also prompt a market re-evaluation of how far the US central bank will need to tighten, given that, if Chinese production cranks up, that should ease the very global supply chain problems which have helped drive the higher US inflation readings that are now so vexing the Fed.
The Fed is set to start hiking rates, while the PBOC certainly is not, but against the backdrop of a global pandemic, that doesn’t automatically translate into material US dollar gains against the yuan.
Neal Kimberley is a commentator on macroeconomics and financial markets
15 Feb, 2022
Since the inflationary pressure on the US is partly a consequence of supply chain dislocations, fast and hard rate hikes won’t be enough if Chinese production does not get back into top gear Such considerations are why investors expecting the US dollar to strengthen against the yuan may be disappointed
As
the Federal Reserve agonises about how far and how fast to raise
interest rates to combat spiking US inflation, the People’s Bank of
China is more likely to ease policy as it seeks to support Chinese
economic growth. The contrast in priorities is obvious, the implications
for markets less so.
In the United States, the pressure is on the Fed to act in the face of rising prices. The US consumer price index hit 7.5 per cent year on year in January, its highest annualised increase since February 1982. That’s a pretty uncomfortable statistic for the Fed and the Biden administration which had both, until recently, sought to characterise upwards US inflationary pressure as transitory.
Fed policymakers who had previously been inclined to “look through” evidence of rising prices now exhibit a pressing need to respond aggressively to those selfsame inflationary pressures.
Markets are not stupid and so have priced in the likelihood that the Fed will front-load interest rate hikes in an attempt to suppress those aspects of higher US inflation that can be influenced by tighter monetary policy. A succession of US rate hikes in 2022 are now baked into market expectations and a Fed hike in March is now surely a certainty, the only question being whether the US central bank will opt for an increase of 0.25 percentage points or throw caution to the wind and tighten by 50 basis points.
Over in China, partly driven by the country’s continuing zero-tolerance approach to containing Covid-19, the People’s Bank of China’s monetary policy stance remains aimed at crafting conditions that keeps the pace of Chinese economic growth on track. Indeed, the PBOC eased monetary policy last month.
This situation necessarily erodes a China-US interest rate
differential that has long been skewed in the renminbi’s favour and
consequently has implications for how the currency markets view the
appropriate level for the US dollar/Chinese yuan exchange rate.
But against the backdrop of the pandemic, higher US interest rates, while China’s remain steady to lower, need not mean material greenback gains versus the renminbi on the foreign exchanges.
But against the backdrop of the pandemic, higher US interest rates, while China’s remain steady to lower, need not mean material greenback gains versus the renminbi on the foreign exchanges.
In part, the inflationary pressure the US is presently experiencing is a direct consequence of decades of US offshoring of production to China, production that has been materially disrupted by Beijing’s zero-Covid policy.
Pandemic-related disruption to manufacturing in China has
resulted in global supply chain problems and exerted upward pressure on
prices worldwide. After all, as Bank of Japan board member Toyoaki
Nakamura said recently, “China’s economy is the world’s market and
factory.”
From this perspective, the best thing for the Fed would be for the Chinese economy to get back into top gear. If not, presumably, a succession of US rate hikes will only realistically influence that segment of higher US inflation unrelated to global supply chain dislocations.
In this scenario, moving hard and fast might make good sense to the Fed in its attempt to curb US inflation, but it’s not necessarily a winning formula. Unless global supply chains normalise, it could end up negatively impacting US economic growth prospects and ultimately it may not enhance the allure of the greenback.
Fortunately for the Federal Reserve, help could be at hand from a Chinese economy that may be stirring. New bank lending in China in January rose 11.5 per cent year on year in January to 3.98 trillion yuan (US$626 billion), more than three times the December figure of 1.13 trillion yuan, data released by the PBOC last week showed.
As Iris Pang, chief economist for Greater China at Dutch bank ING, pointed out: “Most of the loan growth came from corporate longer-term loans.” Even allowing for the fact that Chinese banks tend to book loans at the beginning of the year, “this year’s jump is significant even on a year-on-year basis”.
Supportive PBOC monetary policy combined with buoyant new bank lending may prove to be the boost the Chinese economy needs, zero-Covid policy or not.
That might anyway lead investors to see renewed value in renminbi-denominated investments, but it could also prompt a market re-evaluation of how far the US central bank will need to tighten, given that, if Chinese production cranks up, that should ease the very global supply chain problems which have helped drive the higher US inflation readings that are now so vexing the Fed.
The Fed is set to start hiking rates, while the PBOC certainly is not, but against the backdrop of a global pandemic, that doesn’t automatically translate into material US dollar gains against the yuan.
Neal Kimberley is a commentator on macroeconomics and financial markets