The latest meeting minutes released by the Federal Reserve on November 23 did not contain any unexpected hawkish tones. After four consecutive interest rate hikes of 75 basis points, the vast majority of participants believed that the Fed would soon slow down the pace of rate hikes. They argued that continuing to raise rates significantly would increase the risk of instability or chaos in the U.S. financial system and U.S. Treasury bonds.
However, Federal Reserve policymakers also unanimously agreed that there were few signs of easing inflationary pressures, and that continued rate hikes were necessary to curb inflation. Slowing down does not mean stopping; on the contrary, it implies more frequent rate hikes. Therefore, the terminal interest rate may need to be raised to a level slightly higher than previously expected in 2023.
This indicates that the number of interest rate hikes and the cycle by the Federal Reserve in the next phase will be more and longer than previously announced, which foretells that the interest cost of U.S. debt payments will become increasingly higher and more expensive credit.
This reinforces the possibility that the Federal Reserve, in an attempt to regain credibility for its failure to control inflation, has begun to soften and surrender its aggressive tightening policies, and may shift towards a dovish stance sooner. It is clear that the Federal Reserve, in order to avoid a greater crisis, has panicked and lost some courage on the aggressive rate hike path.
On November 24, the CME interest rate observation tool showed that the market currently expects this round of interest rate hikes to peak in June 2023, with a target interest rate range of 5.0%. As the final interest rate declines and subsequent expectations for rate cuts rise, the expected trajectory of Federal Reserve interest rates shifts towards a dovish stance. The Federal Reserve has already pushed the federal funds rate to between 3.75% and 4% in the November FOMC meeting, a level not seen since January 2008.
However, what shocked Wall Street even more was that the Federal Reserve officially declared for the first time in the meeting minutes that the U.S. economy would enter a recession. Internal economists at the Federal Reserve told participants at the meeting that "the possibility of a recession in 2023 has risen to about 50%." Despite this, Federal Reserve Chairman Powell has been trying hard to convince everyone that there is no possibility of a recession in the U.S.
We note that this is the first time the Federal Reserve has issued a similar warning since it began raising interest rates in March this year. The latest disappointing Purchasing Managers' Index (PMI) data, the latest Consumer Confidence Index returning to a 23-month low, and higher-than-expected unemployment benefit claims, among other key economic data indicators, further provide evidence that the U.S. economy is beginning to enter a recession.
For example, on November 24, the yield spread between two-year and 10-year U.S. Treasury bonds inverted by as much as 76 basis points, the most significant inversion in 40 years. This curve inversion has always been seen as a harbinger of a recession and has once again fueled Wall Street's speculation about a U.S. recession, further signaling that the U.S. economy will experience a deep recession within the next three months.
Furthermore, against the backdrop of a cracked U.S. federal government that may argue over budget and debt ceiling issues, leading to another government shutdown, the current significant decline in U.S. Treasury bond yields and the weakness of the U.S. dollar are already reflecting this change. Economists, including those at Goldman Sachs, predict that the probability of a U.S. recession before October 2023 has reached 100%.
This is because, under the toxic combination of "high debt, high inflation, high interest rates, and low growth," the strong U.S. dollar will eventually backfire on the U.S. economy and undermine the recovery of U.S. manufacturing, beginning to harvest its own people. This has made U.S. corporate executives and Wall Street feel the pain, leading to widespread cost-cutting and layoffs, plunging the U.S. credit market into a storm and posing risks to the U.S. debt burden and U.S. corporate profits.Despite the fact that the pace of the Federal Reserve's interest rate hikes largely depends on the path of inflation, the market believes that the troubled economic growth in the United States may prompt the Federal Reserve to abandon its rate hike actions. However, the financial research team at BWC Chinese website believes that these are only superficial phenomena.
The real reason is that the Federal Reserve is worried that continuous interest rate hikes will quickly push the U.S. economy into a recession and will multiply the interest cost expenditure of the U.S. federal debt, thereby increasing the risk of a debt crisis and having a lasting impact on the status of the U.S. dollar. This also means that for the Federal Reserve, the challenge may have just begun.
It should be noted that when inflation remains at a 40-year high for several quarters, it actually hedges the cost of U.S. debt. However, when the Federal Reserve has to significantly raise interest rates to fight inflation in order to regain credibility, the side effect is that the debt crisis of tens of trillions of dollars currently weighing on the U.S. federal government will come earlier, and may trigger an economic depression. This will actually cause the U.S. Treasury and the Federal Reserve to quickly lose the ability to rescue their own expanding debt.
Because the sharp rise in interest rates has already restricted the U.S. consumer confidence index and productivity, U.S. corporate profits will decline (for example, when more U.S. IT giants announce the start of large-scale cost reduction, it will further prolong the time for the U.S. economy to fall into a recession), causing the U.S. finance to lose its growth momentum. At the same time, the interest cost paid by the United States will increase rapidly.
Therefore, from this perspective alone, the ultimate result of the Federal Reserve's aggressive interest rate hikes will be to bankrupt the United States. It is clear that the U.S. interest rate hikes have raised the borrowing costs of the United States, triggering a strong sell-off in the U.S. bond market since 2022 and the worst performance of U.S. stocks since 1970.
Therefore, from this perspective alone, the explanation of the former U.S. Treasury Secretary Summers is that the ultimate result of the Federal Reserve's aggressive interest rate hikes will officially detonate the U.S. debt crisis nuclear bomb, throwing a financial nuclear bomb into the U.S. debt powder keg. For the U.S. financial market, the combination of "high debt, high inflation, high interest rates and low growth" is a nuclear bomb that officially detonates the U.S. financial debt.
However, things have not ended here, and the current market data appears more hidden.
Analysis suggests that some developed markets and some emerging economies with single economic structures must be prepared for the continuous interest rate hikes of the United States, and warns that the Federal Reserve's firm pace of interest rate hikes may once again shock the financial market and increase the risk of a global financial crisis. As the research team has emphasized on different occasions, every strong U.S. dollar cycle in history will always cause shocks to the global economy and financial market.
An early vivid example of this effect can be referred to Venezuela and Zimbabwe. The latest case can also refer to Turkey, Lebanon, Brazil, Myanmar, Pakistan, Argentina, India, and Indonesia. The economies of these eight countries have also fallen into a fragile pattern of currency and debt crises. The recent sharp drop in the Vietnamese market further means that the strong U.S. dollar is enhancing its effect on the global market.
As a countermeasure, the State Bank of Vietnam has raised the refinancing rate by 200 basis points to 6% twice in an emergency since September this year to combat the sharp decline in the local currency, protect the banking system, curb inflation, and increase financial risks. This is a very rare monetary tightening response policy, which surprises investors. Just by this, it can be seen that the Vietnamese economy and financial market are facing the pressure of being harvested after the Federal Reserve's aggressive interest rate hikes. This also indicates that Vietnam seems to have insufficient reserve funds to defend the Vietnamese dong.
According to a report released by the Malaysian bank on November 24, since October 1, the State Bank of Vietnam has sold at least $46 billion in foreign reserves, which may reduce its foreign reserve scale to about $100 billion. According to the quarterly data provided by CEIC, as of October, Vietnam's foreign exchange reserves are only equivalent to its import amount for more than three months, sounding an alarm.Because, with the accelerated devaluation of the dollar's purchasing power leading to rising commodity prices, and the United States using the switch between loose and tight monetary policies to harvest seigniorage, Vietnam's international reserve assets may be rapidly depleted, leading to some debt and exchange rate risk storms.
Not only that, as of October this year, Vietnam's total external debt amounted to about $180.5 billion, with the total external debt reaching 198.5% of the international reserve assets. Among them, the proportion of external debt in Vietnam's finances has reached 47%, and it continues to expand, which has also led many wise investors to withdraw from the Vietnamese market in advance.
According to Refinitiv Eikon data, within 8 months as of November 20th, sensitive international funds are quietly withdrawing from the Vietnamese financial market. Foreign investors have sold up to 1380 trillion Vietnamese dong worth of assets, almost 5.4 times that of the same period in 2021. As of November 22nd, the Ho Chi Minh Stock Index in Vietnam has fallen by nearly 36%, ranking as the worst performing index globally.
In this regard, the global asset management company, Man Group, warned in a report published a week ago that considering the inability to cope with the sudden rise in dollar borrowing costs, Vietnam is very likely to become a victim of the Federal Reserve's aggressive interest rate hikes and the United States' economic recession, with the Vietnamese economy facing the risk of a 21-year recession. For example, most of the profits in Vietnamese factories are controlled by European and American manufacturers. Similarly, the sharp decline in Vietnam's economy has also sounded an alarm for the above eight countries.