Inflation Eases, US Interest Rate Hikes Enter Phase 2

The U.S. Consumer Price Index (CPI) data for April rose by 4.9% year-on-year, which is less than the expected 5.0%, indicating a further slowdown in inflation.

Despite the fact that the U.S. inflation rate has been declining for ten consecutive months, it is still far from the 2% target, and it is foreseeable that there is no possibility of reaching the 2% target in the second half of this year.

The reason why the U.S. CPI has been able to slowly decline is mainly due to the significant drop in used car prices, which have a large impact on inflation data, and the gradual easing of housing price pressures.

In addition, the price of crude oil also fell in April, dropping from over 80 to a low of 60, and then returning to 70.

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As a result, the CPI data was suppressed, falling below the expected 5%.

However, excluding energy and food, the core inflation rate in April remained at a high level of 5.5%, which has been in a horizontal phase for four consecutive months, showing persistent high viscosity.

After the release of the April CPI data, the latest data from CME's "FedWatch" shows that the probability of the Federal Reserve keeping interest rates unchanged in June has risen to 93.9%, while the probability of raising interest rates by 25 basis points has dropped to 6.1%.

It can be considered that the U.S. interest rate hikes are finally coming to a halt, and the next phase will switch from the first phase to the second phase, maintaining the current high interest rates for a period of time.

The U.S. interest rate hike enters the second phase.

In order to suppress the high domestic inflation pressure, the Federal Reserve began aggressive interest rate hikes in March last year.In just a short span of 14 months, the U.S. federal funds rate has skyrocketed from 0.25%-0.5% to 5%-5.25%. Although the inflation level is still far from the target, there is no more room for further rate hikes.

Therefore, the United States can only maintain the current high interest rates and wait for the CPI data to slowly decline over time.

The market has made such a judgment mainly based on two reasons:

On the one hand, the Federal Reserve has repeatedly emphasized that the 2% inflation target will not change, and Federal Reserve Chairman Powell's attitude has been very tough, repeatedly stating in speeches that rate hikes will not plunge the U.S. economy into recession.

However, the actual situation is that since March of this year, U.S. banks have been in turmoil, and further rate hikes are no longer realistic.

On the other hand, although the CPI data this time is slightly lower than expected, the inflationary pressure within the United States remains high, which can support a pause in rate hikes, but absolutely does not support rate cuts within the year.

Once the Federal Reserve chooses to cut rates, giving the market a relatively loose expectation, it is likely to lead to a continued upward trend in inflation, rendering the efforts of the Federal Reserve over the past year and a half in vain, which the Federal Reserve would never accept.

Therefore, the Federal Reserve now has few options, and the most realistic approach is to maintain the high interest rate of 5.25%, preserving the value of the dollar while also avoiding a collapse of the U.S. economy.

But the question is, even if the Federal Reserve stops raising interest rates, will the crisis in U.S. banks be "controllable"?

Banks are currently lining up to "go to the rooftop", with banks such as Signature Bank, Silicon Valley Bank, and First Republic Bank having gone bankrupt one after another, and many more banks are on the brink of death.U.S. Banking Crisis Spreads

A recent report released by the Federal Reserve indicates that over 700 banks in the United States currently have significant unrealized losses on their balance sheets, facing "major safety and solvency" risks, with reported losses exceeding 50% of their capital.

The direct reason for so many banks being at risk is the Federal Reserve's interest rate hikes. The Federal Reserve has never cared about the origin when it comes to "mowing the lawn" (cutting profits), and in desperate times, it will not hesitate to cut even the "lawns" of American banks.

In recent years, the Federal Reserve has maintained a loose monetary policy with low interest rates, leading many American banks to purchase a large amount of U.S. Treasury bonds and related bonds. However, due to the massive money printing in the United States in 2020, which led to high domestic inflationary pressures, the Federal Reserve had to raise interest rates aggressively starting from March last year, causing the yield on U.S. Treasury bonds to invert.

Currently, the yield on 10-year Treasury bonds is 3.4%, while the yields on 3-month and 6-month Treasury bonds are both over 5%. Since the price of U.S. Treasury bonds is inversely proportional to their yields, this means that the value of the U.S. Treasury bonds held by these banks is continuously depreciating, resulting in paper losses on their books.

Bank operations also require capital turnover. Once these banks sell U.S. Treasury bonds to recoup their losses, the paper losses turn into actual losses. Coupled with a run on the banks, bankruptcy becomes inevitable.

The reason why Silicon Valley Bank exploded was due to the continuous depreciation of the bonds it held, increasing liquidity pressure and risks, forcing it to sell Treasury bonds and related bonds in advance, resulting in a loss of $1.8 billion and triggering a run on the bank.

Therefore, the Federal Reserve's calculations are very clear: as long as the banking crisis is "controllable," it is not a concern for them.The United States needs to "mow the lawn" in the banking industry to maintain the stability of U.S. debt and the dollar, while at the same time not wanting the entire financial sector to collapse. Therefore, from this perspective, they will also maintain high interest rates, watching as small and medium-sized banks gradually fall one by one.

However, this tightrope-walking game is indeed dangerous, and it could easily backfire.

How long will the financial crisis last?

The continuous interest rate hikes by the Federal Reserve are only the direct cause of this financial crisis. Essentially, the United States' excessive money printing and failure to harvest the global economy are the root causes of this financial crisis.

The reason the Federal Reserve keeps raising interest rates is that after the dollar flows back to the United States, it will lead to a large-scale reduction of dollars in the global market, which in turn will cause many countries to experience economic or debt crises.

At this time, the United States can use the appreciated dollar to make precise harvests, taking other countries' high-quality stocks or assets into its own hands to alleviate its own economic problems.

In the past, the United States relied on the dollar hegemony, and this "dollar tidal wave harvest method" was invincible, including India, Russia, South Korea, and so on, all of which were victims.

But now people all over the world are clear that the essence of American finance is "mowing the lawn," so everyone is busy de-dollarizing, and the United States' well-calculated plan has failed.

The United States has no choice but to turn its target to the domestic front, and those banks with a lot of U.S. debt have to become sacrificial lambs.

Therefore, it can be foreseen that more and more banks will explode in the future, until the Federal Reserve is fed enough, the U.S. debt problem is greatly alleviated, and the inflation level is close to the target, the Federal Reserve may start a rate-cutting cycle.At this time, the market estimates that the earliest it could happen would be by 2024. It's unknown what thoughts the American banks currently in crisis are having.

In conclusion:

The CPI data for April in the United States does not sufficiently support the Federal Reserve's subsequent rate cuts.

Should a rate cut occur, there is a high probability that U.S. inflation will rebound in the second half of the year, implying that more than a year of work by the Federal Reserve would be completely wasted.

However, maintaining a high interest rate of 5% by the Federal Reserve will inevitably lead to the continuous spread of financial crises. It can be inferred that this financial crisis will not end in the short term, and there will be continuous exciting events unfolding in the second half of the year.