The global economic recession in 2024, the Federal Reserve is definitely going to take the blame.

What are the impacts of the Federal Reserve's delayed interest rate cut?

To curb inflation, the United States started raising interest rates from 2022, causing global currencies to flow back to the U.S., leading to economic recessions in various countries. Now, countries have barely endured until the arrival of the interest rate cut cycle, looking forward to the Federal Reserve's interest rate cut to release liquidity. However, the latest non-farm data has made the timing of the rate cut seem distant once again.

This is because Friday's non-farm data showed that the U.S. non-farm employment population increased by 353,000 in the first quarter, setting the largest increase since January last year. Not only that, but the data also far exceeded the market's expectation of 180,000 people, even approaching double the growth rate.

So, what does the surge in non-farm data actually mean? How does excellent employment data affect the Federal Reserve's decision to cut interest rates? What are the subsequent impacts? Today, let's talk about this topic.

The U.S. employment far exceeded expectations, is the Federal Reserve's interest rate cut off again?

Non-farm data is actually employment data. The non-farm data far exceeding expectations this time means that the recruitment demand of U.S. companies and employers is very strong, and the U.S. job market is very good.

Employment situation itself is a barometer of the national economy, so the excellent U.S. employment data indicates that the U.S. economy is not bad, especially the excellent employment rate in January, which means that the economy in the next few months will not be bad either.

The U.S. non-farm data in January was off the charts.

Therefore, the previous global institutions' bearish views on the U.S. economic recession have basically cooled down. Today's U.S. has temporarily achieved a "soft landing" in the recession cycle of 2024.A soft landing of the U.S. economy is a good thing for the United States, but not so much for the rest of the world. This is because the side effect of the Federal Reserve's interest rate hikes is a global currency flow back to the U.S., leading to economic recessions in countries around the world, especially in developing nations where the rate of economic decline has noticeably accelerated.

Under normal circumstances, the U.S. economy would also experience a significant recession after interest rate hikes. However, this time, the soft landing of the U.S. economy is largely achieved through fiscal measures of "borrowing." As a result, we see a very divided situation: the global economy is in a recessionary cycle, but the Federal Reserve uses borrowing to print money, ensuring a soft landing for the domestic economy.

This has led to the Federal Reserve's interest rate cut timing being postponed from the originally scheduled March to May, and due to the non-farm data in May, it has become even more uncertain. The Federal Reserve was expected to ease monetary policy next month, and other developing countries would have welcomed investments from capital flowing out of the U.S., but now, this timeline has to be pushed back again.

Therefore, the market has already begun to re-evaluate the probability of the Federal Reserve's interest rate cuts. I checked the data from the Chicago Mercantile Exchange, and the probability of a 25 basis point rate cut on March 24th is 38%, significantly lower than the previous 50%. The probability of a rate cut on May 24th is currently 59.6%. It can be considered a likely event.

The probability of a rate cut in March has already dropped to 38%.

So, looking at the probabilities given by the market, the probability of a rate cut in May is relatively high, but it is only 60%, which is a considerable delay compared to previous expectations. However, the rate cut in March is essentially a bit "cooling off." Central banks around the world expecting a rate cut will likely have to wait a bit longer.

Some senior international economist even judged that the Federal Reserve's first interest rate cut decision is likely to occur in the second half of the year. After all, the non-farm data shows that the U.S. job market is very hot.

How does the release of non-farm data affect China?

So, how will a series of policy changes in U.S. macroeconomics affect our Chinese economy? Let's talk about the impact of the postponed rate cut on China's economy.

Firstly, the Federal Reserve's interest rate hikes are definitely bearish for China's economy, while rate cuts are generally bullish, so the postponement of rate cuts is actually unfavorable for the recovery of China's economy.For instance, when it comes to foreign trade, one of the three driving forces of China's economy, it serves as one of the pillars of China's economic growth. We rely on it to secure a trade surplus of around trillions of yuan each year, which helps many domestic companies secure orders.

Foreign trade is one of the three driving forces of China's economy.

However, when the Federal Reserve raises interest rates, global economic activity is restrained, and the purchasing power of foreign residents declines. Consequently, domestic Chinese enterprises, manufacturing industries, and foreign trade companies may fail to secure orders.

This year's Chinese economy actually needed a boost from foreign trade and manufacturing through interest rate cuts to drive domestic economic recovery. Now, it appears that this recovery may be delayed until the middle of the year, or even the second half.

The second point is the impact of high interest rates on China's financial system.

Since the Federal Reserve raised interest rates, there have been issues with the Chinese yuan exchange rate. The rate hike led to the appreciation of the US dollar, causing the yuan to depreciate continuously, even touching the historical threshold of 1 US dollar to 7.3 yuan.

The recent trend in the yuan exchange rate has shown depreciation.

After the Federal Reserve signaled the expectation of interest rate cuts, the yuan exchange rate appreciated significantly, fluctuating around the rate of 7.1. Now that the expectation of rate cuts has not materialized, US Treasury yields have surged, and the US dollar has shown strength. It is naturally unlikely for the yuan exchange rate to appreciate significantly.

This means that we still need to pay more attention to the yuan exchange rate and cannot easily adopt measures such as interest rate cuts and reserve requirement ratio reductions to lower the yuan's interest rates. Otherwise, it would lead to an increasing interest rate gap between China and the United States.

The larger the interest rate gap between China and the US, the greater the possibility of domestic capital outflow and the smaller the likelihood of foreign capital entering the Chinese market for investment, which is not conducive to China's utilization of foreign capital.If the Federal Reserve does not cut interest rates, then the policy space for the central bank to lower interest rates becomes smaller.

Originally, according to our judgment, if the Federal Reserve were to cut interest rates in March, then one month later, the interest rate gap between China and the United States would narrow, and the space for domestic interest rate cuts would be greater. The central bank could stimulate the economy by lowering interest rates. But now, the timing may be delayed.

Thirdly, the benefits for the stock market will come a bit later.

As is well known, if the Federal Reserve is in an interest rate hiking cycle, it is actually unfavorable for the global stock market, which can be considered a bearish factor. Therefore, from 2022 to 2023, the performance of the global capital market can be said to be quite poor.

However, as the Federal Reserve's interest rate hiking cycle reached its peak in the second half of last year, and the market began to speculate that the interest rate cutting cycle had begun, the global capital market entered a bull market. Whether it is EU countries, Japan, South Korea, or the U.S. stock market itself, the trend is very good. Because when interest rates are cut, it is equivalent to a global "massive easing of liquidity."

Benefiting from the depreciation of the yen, the Japanese stock market has seen a sharp increase.

And what benefits from the massive easing of liquidity? In fact, it is the global capital market. Under the loose cycle and the interest rate cutting cycle, the global stock and bond markets are all favorable.

The United States reaps the benefits first, but the bitter fruit comes later.

From the current situation, the U.S. economy can be said to be "winning big." Whether it is the GDP growth rate in the fourth quarter that exceeded expectations, or the non-farm data in January, it indicates that the U.S. economy is very "healthy." Therefore, the hard landing we were worried about before is gone, and the U.S. economy has basically announced a "soft landing."

However, the price the United States has paid is actually very exaggerated. The U.S. GDP increased by $320 billion in the fourth quarter, but the fiscal deficit was as high as nearly $510 billion, and the debt increased by nearly $1 trillion.So, it is evident that the U.S. economy is indeed in a "golden age," but behind this facade lies a mounting debt that grows every day. The U.S. economy is propped up by a frantic "burning of dollars."

Powell would not be willing to take responsibility for the $34 trillion debt.

Thus, the current United States has reaped the benefits of "money printing," with a thriving economy. However, how will the future $34 trillion debt be resolved? Will the dollar experience a premature implosion? Whether it's Powell, Biden, or Yellen, it is challenging for any of them to address this issue.

For them, a dollar implosion might be inevitable, but it won't happen in the near future. By the time it does occur, they will no longer be in office. Therefore, "trusting in the wisdom of future generations" has become the best option for Biden.