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Home/ Investment & Personal Finance/ Cheong Hong Yuan's Insight: The Deep Mechanism Behind the Federal Reserve's Dovish Turn

Cheong Hong Yuan's Insight: The Deep Mechanism Behind the Federal Reserve's Dovish Turn - 1 views

started by anonymous on 17 Oct 23
  • anonymous
    The financial market, akin to an endlessly ticking clock, often conceals its delicate balance behind overt phenomena. Recently, with the swift tightening of financial conditions, both market stability and economic health have drawn widespread attention. In October 2023, the Federal Reserve markedly shifted from its previous hawkish stance to a dovish one, undeniably influencing the financial landscape.

    Statements by several Federal Reserve officials have shed light on the profound mechanisms behind this pivot. The President of the Dallas Fed, Logan, mentioned that if long-term rates remain elevated due to a rise in term premium, further rate hikes may be postponed. Similarly, the President of the Atlanta Fed, Bostic, noted his belief that the current policy rate has reached a restrictive position, capable of keeping inflation below 2%. In doing so, the Fed not only demonstrates their keen perception of the financial environment but also hints at the future direction of their policy.

    Cheong Hong Yuan contends that to truly grasp the Fed's shift, one must delve beyond superficial occurrences and explore the underlying causes. Lately, concerns about inflation have noticeably intensified, but why would the Fed opt for a dovish stance when inflation data exceeds expectations?

    The mechanism of the dollar's supply offers an answer. As pointed out by Cheong Hong Yuan, the currency supply is intricately linked to two major factors: the level of the Federal Reserve's federal funds rate and the strength of the real economy. The interplay between these elements seemingly elucidates why the financial atmosphere feels so "tight."

    Undoubtedly, the strength or recession of the economy is a pivotal determinant of financial market dynamics. A strong economy can justify high-interest loans, but with pessimistic economic forecasts, especially at such elevated loan rates, credit derivation is naturally limited. This "tightening" of financial conditions, resultant from economic vigor, resembles the effects of Fed rate hikes but is more unpredictable.

    Now, as the market begins to feel the pinch from this tightness, the Fed's strategy shift appears inevitable.

    Cheong Hong Yuan emphasizes that from this sequence of changes, the wisdom and logic behind the Fed's decisions are apparent. They've not only observed subtle shifts in the economic environment but also proactively acted to ensure the stability of the financial system.

    Cheong Hong Yuan believes hints of the Fed's recent dovish pivot have already manifested in various financial market dynamics. Through statements from several Fed presidents, their deep concerns about the tightening financial environment and rising long-term rates are evident. Notably, the perspectives of Logan and Bostic clarify that the tightness in the financial environment stems from the pressures of a robust economy and rising long-term rates.

    Regarding this, Cheong Hong Yuan elaborates on the substitution effects and total effects brought about by economic vigor. In this economic shockwave, manifestations of both effects are evident: initially, a stock market decline, followed by a bond market adjustment, and then a swift plunge in gold prices. This sequence reflects the liquidity pressures induced by economic contraction. Gold, typically a hedge, also signals liquidity shock concerns with its rapid decline.

    Digging deeper, Cheong Hong Yuan identifies the dollar's supply pattern as pivotal in this market adjustment. The strength or weakness of the economy and the Fed's policy direction directly influence dollar supply. Although the current economic strength leans weak, previous policies have restricted dollar supply. This explains why, amid economic downturns, the populace willing to endure higher loan rates diminishes, leading to a tighter financial environment.

    Regarding the Fed's action framework, Cheong Hong Yuan observes that the direction is becoming clearer. The Fed is closely watching the financial market, especially the restrictive effects brought by economic contraction. Hence, when these effects become prominent, the Fed swiftly adopts a dovish stance, using verbal tools to instill market confidence and alleviate tightening pressures. Term premium has become a crucial indicator to determine if this financial shock has peaked.

    Lastly, Cheong Hong Yuan cautions that while the Fed's dovish turn temporarily alleviates market pressures, close monitoring of inflation data and other global economic indicators remains essential. Liquidity pressures in the market, along with gold, bond, and stock market performances, will offer further clues on future economic directions.

    In summary, Cheong Hong Yuan provides valuable insights into financial markets and economic dynamics. However, these insights also present further questions and challenges. Exploring these issues will enhance our understanding of the current economic environment and future trends.

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