Where are the risks to the U.S. economy

　　Once a fire is found next door, the most important thing is to put out the fire with the neighbor, rather than accuse the neighbor of carelessness. Because once the fire spreads, my house will not be protected. This is the warning to the central bank by the three “fire captains” Bernanke, Geithner and Paulson in the book “Fire Fighting”. This view has been deeply rooted in the hearts of the people and a consensus has been formed. Therefore, after the COVID-19 pandemic, the global monetary policy has become more accommodative, with more consistent steps, and faster actions. The Fed, the Bank of England, and the European Central Bank’s balance sheets (divided by GDP) have all reached record highs. It is likely to kill an economic crisis or an existential crisis in the cradle, but the “K-shaped” recovery characteristics of the economy, superimposed on the skyrocketing prices of commodities and risky assets, have made monetary policy a dilemma.
　　Since the second quarter of this year, when the Federal Reserve will reduce its asset purchases (Taper), in what order, and at what speed has withdrawn from the unconventional monetary policy, it has aroused market concern. We have proposed that the logical thread should be where the desired policy interest rate lies. Based on the Fed’s new monetary policy framework (maximum employment and average inflation target), the implied policy interest rate of the “New Taylor Rule” reached -0.47% at the end of the second quarter, which was similar to when Taper was launched at the end of 2013. However, considering the asymmetry of employment recovery after the epidemic, the “noise” in employment data, and the implementation of the “average inflation target”, the Fed may delay the start of Taper until the end of 2021. From the Jackson Hole meeting at the end of August to the present, the Fed’s signal on Taper has been consistent with our expectations. The Fed’s September meeting on interest rates further confirmed the start of Taper at the end of the year.
　　In May 2013, former Federal Reserve Chairman Ben Bernanke unexpectedly released a signal to reduce asset purchases (Taper), triggering a “TaperTantrum” (TaperTantrum)-U.S. Treasury long-end interest rates and the U.S. dollar index rose sharply, and the exchange rates of emerging market countries Significant depreciation and continued expansion of credit risk premiums. With lessons learned, will it be different this time? What is different about “Taper2.0”?
　　We believe that the impact of Taper 2.0 will be more moderate, because compared with 2013: (1) The current account deficits of major emerging market countries in 2020 will be significantly narrowed, and the foreign exchange reserve adequacy ratio will also increase significantly. The average current account deficit rate of the “Fragile Five Countries” has dropped from 4.4% to 0.4%, and the foreign exchange reserve adequacy ratios of India, Brazil, Indonesia, and South Africa have all been mentioned above 7%; (2) The pressure on capital outflows is relatively small. From 2000 to 2012, the capital account of emerging and developing economies continued to have a surplus for 13 years. From 2006 to 2008, it remained above US$500 billion for three consecutive years. However, it continued to suffer a deficit from 2015 to 2019. Only a small margin was recorded in 2020. The surplus, this time the pressure of capital outflow is much lower than in 2013; (3) The Fed has learned historical experience and lessons, focused on communication with the market, and repeatedly emphasized that it will notify in advance before Taper, and at the FOMC meeting in July 2021 Two new standing repurchase facilities (SRF and SMIFA) have been newly established; (4) According to the results of the New York Fed’s primary dealer survey in July 2021, the market expects that the Fed may start Taper in the fourth quarter of 2021. These factors all help alleviate the liquidity shock that may occur when Taper or shrinking the balance sheet.
　　At the Jackson Hole meeting at the end of August, Powell clearly issued a Taper signal, saying that “if economic development is in line with expectations, it is appropriate to start reducing asset purchases this year.” The “reduction panic” did not repeat itself. The Wall Street Journal (WSJ) predicted in its June 2021 article that “shrinking panic” has become “tapertranquility.”
　　However, the current account balance and foreign exchange reserve adequacy ratios of Turkey and Argentina are still negative, and the gap is larger than in 2013. For economies with insufficient foreign exchange reserves, if they want to alleviate the pressure of capital outflows and upward credit risks, they must either close their capital accounts or follow (or before) the Federal Reserve to raise interest rates. During the Taper 1.0 period, 13 emerging market countries raised interest rates by an average of 40bp. Among them, countries with insufficient foreign exchange reserves raised interest rates by an average of 110bp, while countries with sufficient reserves dropped by 5bp. The tightening effect of interest rate hikes often exacerbates panic in the capital market or foreign exchange market.
　　The current uncertainty at the economic and financial level mainly comes from the continuity and intensity of stagflation. Since the second quarter, the downward pressure on the U.S. economy has begun to appear, and finances will become a drag on economic growth next year. At the same time, due to the interference of the epidemic, the interruption of the global value chain will be difficult to solve in the short term, and supply bottlenecks will still exist. The recovery of real estate and the upward price of raw materials are still important supports for inflation. The stagflation macro environment is generally negative for equity and fixed income securities.