The US Federal Reserve decided to raise interest rates by 75 basis points at its meeting on Wednesday.
The Joe Biden administration wants too much, with global food and energy crises triggered by harsh sanctions imposed on Russia, and desires to woo voters in the midterm elections with an economic boom while not canceling the lost-lose tariffs on Chinese goods. The technocrats' historical lessons about the Great Depression and the subprime crisis were misapplied to the post-pandemic reboot, and his reform ambitions led him to introduce two big, costly bills. All this complexity has created solid ground for inflation to rocket.
The US may suffer a nasty case of stagflation. This is because the US mistakenly took the post-pandemic economic restart as the trigger for the economic crisis. In fact, as the post-pandemic era resumes, demand has not been boosted by the spending power of US citizens, thanks to continued and massive financial assistance, but supply chains are taking a long time to recover, creating a chain of shortages in many key factors from chips to labor. Overstimulated monetary policy during the pandemic had already driven commodity prices too high, and the conflict between Russia and Ukraine exacerbated those dynamics.
In other words, there is a huge distortion in the resource allocation in the US and a bubble in international commodity prices inflated by excess liquidity that can only be straightened out by a recession. But the US is reluctant to accept such a restart. In the end, the US will continue to reinforce the dangerous imbalances that existed before the subprime crisis, particularly the polarization of the rich and poor in the US and the distortion of the economic structure.
As for China, the country needs to analyze the situation objectively and rationally, and its macroeconomic policies should not be dictated by short-term goals.
The stagnation in the US will reduce China's export demand, and the spillover of Fed policy will have a certain impact. However, the influence of the US on the Chinese economy is diminishing, and more importantly there is no inflation risk in China, the domestic demand-driven economy is stabilizing and recovering, and a large amount of foreign capital is still pouring into the Chinese market. The independence of China's economy has made China a rare safe haven in the world. China needs to continue to do its own thing well, and in so doing to reduce the impact of global inflation and financial shocks.