Societe Generale Securities: Is the Federal Reserve “stabilizing the US dollar” or “stabilizing US debt”? Global capital's views on US assets may change

The Zhitong Finance App learned that Societe Generale Securities released a research report saying that the Federal Reserve suddenly switched from insisting on high interest rates in the early stages to cutting interest rates sharply, or pointing to the Fed's phased abandonment of the goal of “stabilizing the dollar,” and the attractiveness of US dollar assets declined. However, the Federal Reserve gradually weakens the goal of “stabilizing the dollar,” and once the monetary policies of “allied” countries are out of sync, it may cause even greater instability. Looking back, the Fed's decision may continue to “screw up”. Failure to rule out “stabilizing the US dollar” after a period of “stabilizing US debt” will once again force the Fed to adjust its policy direction. These factors may influence how global funds view US assets. In fact, the exchange rate market recently showed that the RMB appreciated significantly faster than the US dollar index compiled in the currencies of a few US “allies.” Looking back, whether this change will spread to other assets, such as changes in global capital's views on A-shares, is also worth watching.

The US government's economic and trade policies are destabilizing the dollar system. In the first 20 years after the end of the Cold War, globalization continued to advance, and the US dollar's position as the central currency of global trade, investment and financing continued to rise. However, since 2016, the United States has been pursuing “decoupling and breaking the chain” and “high walls in the courtyard.” US measures such as trade protection and sanctions against major trading powers such as China and Russia are shrinking the scope of use of the US dollar. Meanwhile, America's frequent use of financial sanctions has also raised market concerns about holding dollars. Under these circumstances, in order to maintain the attractiveness of the US dollar, the US needs to maintain high interest rates and a strong currency value.

However, if the US continues its policy of high interest rates, it will also destabilize the US debt system. While adopting external trade protection, the US has already switched to a “big government” mentality domestically, which has pushed the US government debt ratio to a historically high level. Moreover, judging from the recent US strategic plan, the US will maintain a high level of financial investment in the future. In this context, if high interest rates continue, it will mean that the interest burden on debt will expand rapidly, leading to an accelerated rise in the debt ratio itself, causing the market to worry about the sustainability of US debt.

Whether “stabilizing the US dollar” or “stabilizing US debt,” the Federal Reserve's monetary policy framework may have undergone systemic changes. As can be seen from the above analysis, in addition to its traditional focus — employment and inflation — the Federal Reserve must also focus on maintaining the attractiveness of the US dollar and maintaining the sustainability of US debt. However, the demands of these two goals on the Federal Reserve are contradictory. “Stabilizing the US dollar” requires relatively high interest rates to maintain its appeal to capital, while “stabilizing the US debt” requires interest rates not to be too high. The Federal Reserve faces a “double pillar” constraint. If it favors one side, it may mean briefly abandoning the other party's demands. The recent shift in easing by the Federal Reserve may mean that the Fed's policy is more focused on “stabilizing US debt” in the short term.