The Insight: The Federal Reserve officially began its rate-hiking cycle on September 17 this year. The previous time the Fed initiated such a cycle was in March 2022. Four years apart, what are the differences between these two rate-hiking cycles? What lessons can we draw?
Inflation levels differ: Looking back at March 2022, the U.S. CPI year-on-year inflation rate was already high at 8.5% and still rising, peaking at 9.1% in June of the same year—the highest level in decades. The inflation environment at that time could be described as not only high in level, but also rapid in pace and broad in scope. This explains why the Fed had to raise rates aggressively and substantially back then. In contrast, the latest U.S. year-on-year inflation rate for August stands at only 3.4%, a markedly different inflationary context.
Different starting points for rate hikes: Before the 2022 rate-hiking cycle began, the federal funds rate range was only 0% to 0.25%. With interest rates extremely low and far below the 8.5% inflation level at the time, this explains why the Fed had to implement substantial rate hikes. Today, however, the federal funds rate is already in the range of 3.75% to 4.0%, exceeding the current inflation level of 3.4%. Thus, there appears to be no need for panic-driven, aggressive rate hikes.
Total debt levels are vastly different: In 2022, total U.S. federal debt was approximately $31 trillion. As of today, the debt level has surpassed $40 trillion, an increase of nearly 30% compared to that time. Facing such a massive debt burden, each one percentage point increase in interest rates significantly raises the U.S. government's interest expenses. Moreover, markets have begun questioning the U.S. government's fiscal management capacity, leading to declining confidence in U.S. Treasury purchases, especially long-term bonds. This is reflected in the benchmark U.S. 10-year Treasury yield, which not only remains above 5%, a 19-year high, but continues to rise. Under these circumstances, even if the Fed considers raising rates, it must proceed with caution.
Rate hikes cannot curb inflation stemming from supply-side factors: The current U.S. inflation is largely driven by geopolitical instability in the Middle East, which has pushed oil prices higher. In fact, raising rates alone is ineffective in curbing inflation caused by rising oil prices. The reason is that rate hikes can only suppress inflation driven by overheated demand but cannot directly increase oil supply to lower inflation. Instead, by raising rates, the Fed aims to prevent energy price increases from spreading further into other goods and services and to help maintain stable inflation expectations in the market. Therefore, to achieve this goal, the Fed does not need to implement aggressive rate hikes.
Recently, markets often compare the rapid rate-hiking cycle of 2022 with the current situation, attempting to draw insights for the current cycle. However, there are significant differences in the actual circumstances compared to 2022. Therefore, as shown in the Fed's 'dot plot' (i.e., projections by Fed officials on future interest rate paths) released on September 17, while the possibility of one more rate hike by the Fed this year cannot be ruled out, interest rates may be nearing their peak. The timing of such a hike could possibly be at the December 10 meeting. Wen Cheuk-Pui, Chief Market Strategist, Hang Seng Bank
*Articles published in ET Net, whether signed or unsigned, represent the authors' personal opinions and do not reflect ET Net's stance. ET Net serves as a platform providing a free forum for expression.
Inflation levels differ: Looking back at March 2022, the U.S. CPI year-on-year inflation rate was already high at 8.5% and still rising, peaking at 9.1% in June of the same year—the highest level in decades. The inflation environment at that time could be described as not only high in level, but also rapid in pace and broad in scope. This explains why the Fed had to raise rates aggressively and substantially back then. In contrast, the latest U.S. year-on-year inflation rate for August stands at only 3.4%, a markedly different inflationary context.
Different starting points for rate hikes: Before the 2022 rate-hiking cycle began, the federal funds rate range was only 0% to 0.25%. With interest rates extremely low and far below the 8.5% inflation level at the time, this explains why the Fed had to implement substantial rate hikes. Today, however, the federal funds rate is already in the range of 3.75% to 4.0%, exceeding the current inflation level of 3.4%. Thus, there appears to be no need for panic-driven, aggressive rate hikes.
Total debt levels are vastly different: In 2022, total U.S. federal debt was approximately $31 trillion. As of today, the debt level has surpassed $40 trillion, an increase of nearly 30% compared to that time. Facing such a massive debt burden, each one percentage point increase in interest rates significantly raises the U.S. government's interest expenses. Moreover, markets have begun questioning the U.S. government's fiscal management capacity, leading to declining confidence in U.S. Treasury purchases, especially long-term bonds. This is reflected in the benchmark U.S. 10-year Treasury yield, which not only remains above 5%, a 19-year high, but continues to rise. Under these circumstances, even if the Fed considers raising rates, it must proceed with caution.
Rate hikes cannot curb inflation stemming from supply-side factors: The current U.S. inflation is largely driven by geopolitical instability in the Middle East, which has pushed oil prices higher. In fact, raising rates alone is ineffective in curbing inflation caused by rising oil prices. The reason is that rate hikes can only suppress inflation driven by overheated demand but cannot directly increase oil supply to lower inflation. Instead, by raising rates, the Fed aims to prevent energy price increases from spreading further into other goods and services and to help maintain stable inflation expectations in the market. Therefore, to achieve this goal, the Fed does not need to implement aggressive rate hikes.
Recently, markets often compare the rapid rate-hiking cycle of 2022 with the current situation, attempting to draw insights for the current cycle. However, there are significant differences in the actual circumstances compared to 2022. Therefore, as shown in the Fed's 'dot plot' (i.e., projections by Fed officials on future interest rate paths) released on September 17, while the possibility of one more rate hike by the Fed this year cannot be ruled out, interest rates may be nearing their peak. The timing of such a hike could possibly be at the December 10 meeting. Wen Cheuk-Pui, Chief Market Strategist, Hang Seng Bank
*Articles published in ET Net, whether signed or unsigned, represent the authors' personal opinions and do not reflect ET Net's stance. ET Net serves as a platform providing a free forum for expression.
