Raise interest rates or cut interest rates？ What signals did the Year of the Loong, the three central banks of the United States, Europe and Japan release？

The Federal Reserve raised the target range of the federal funds rate to 5.25% to 5.50% in July last year, and has kept the interest rate unchanged for four consecutive times since then. In the interest rate resolution issued by the Federal Reserve late at night on February 1, local time, it was decided to keep the benchmark interest rate stable. Although Federal Reserve Chairman Powell praised the current resilience of the US economy, emphasizing its strong growth momentum and the expected decline in inflation, he cautiously pointed out that the US economy is still on the verge of a "soft landing", the pace of the job market is gradually slowing down, and whether inflation can continue to fall in the future still needs more data support.Although Powell did not give a clear signal on the timing of interest rate cuts, he firmly indicated that the Fed would not act rashly.

The withdrawal of the Fed’s attitude towards interest rate cuts is a decision made in combination with the latest US economic data.The data on inflation shows that the inflation rate in the United States is still at an uncomfortably high level, and the road to fighting inflation is bumpy. From December 2023 to January 2024, the inflation rate in basic demand areas such as housing, food and electricity in the United States increased. In January, the consumer price index (CPI) in the United States exceeded expectations, and the core CPI did not fall again year-on-year. The core CPI was the biggest increase in eight months. After the release of CPI data, US President Biden said that the cost of inflation is increasing day by day and he can’t afford to wait longer. Wall Street analysts believe that the data further reduces the possibility that Fed officials will start to cut interest rates soon. If inflation accelerates further, it may even rekindle the discussion that Fed officials will resume raising interest rates.

The euro zone narrowly avoided recession last year, and the price pressure fell faster than expected, thus supporting the view of those who advocate early interest rate cuts. However, whether we can launch the arrow to cut interest rates in the Year of the Loong depends on a more comprehensive observation of economic data.

On January 25th, the European Central Bank kept the interest rate unchanged again, and the main refinancing rate, marginal lending rate and deposit mechanism rate were 4.50%, 4.75% and 4.00% respectively. European Central Bank President Lagarde said that the Governing Council of the European Central Bank thinks it is too early to discuss interest rate cuts. We need to go further in the process of falling inflation, so that we can have enough confidence that inflation will really reach the target level in time. Future salary data is very important for deciding the timing of interest rate cuts. After the meeting, ECB policymakers revealed that if the data to be released confirmed that the inflation problem had been overcome, the wording might be changed at the March meeting, paving the way for a possible interest rate cut in June.

Other ECB officials also warned against premature interest rate cuts. Nag, a member of the management committee of the European Central Bank and governor of the Bundesbank, said that history shows that it is worse to loosen monetary policy too early than too late. He warned that premature action "will eventually lead to higher economic costs." Schnabel, a member of the Executive Committee of the European Central Bank, also warned recently not to reduce borrowing costs prematurely. High inflation in the service industry, strong flexibility in the labor market, loose financial environment and tension in the Red Sea are all risk factors for prices.

However, in the view of Philip Ryan, chief economist of the European Central Bank, it is risky to cut interest rates too early or too late. Although the current inflation trend is very good, it still needs more time to ensure that the price increase returns to the target level of 2%.

Due to the continued sluggish domestic demand, Japan’s economy has fallen into negative growth for two consecutive quarters since the second half of last year, and the fundamentals are hardly optimistic. The main reasons for Japan’s sluggish domestic demand are persistent inflation, wage increase less than price increase, and restrained household purchasing power. In 2023, real wages in Japan fell by 2.5%, falling for two consecutive years, which is the biggest decline since 2014. Judging from the latest data such as industrial and mining production, the downside risks of Japan’s economy still exist in the first quarter of this year, or there has been a negative growth situation for three consecutive quarters. It is difficult for the Bank of Japan to make policy choices when real wages cannot keep up with the pace of rising prices.

Judging from the current situation, achieving the goal of steady wage increase is a prerequisite for the Bank of Japan to gradually normalize its monetary policy. Last month, the Bank of Japan stressed that price increases should be driven by demand and higher wages, rather than cost-driven inflation caused by energy prices and weak yen. At a news conference last month, Bank of Japan Governor Kazuo Ueda pointed out that he would continue to carefully evaluate the data to measure the progress of the chain effect of wage increases on prices gradually spreading to a virtuous circle.