Fed rate decisions unlikely to avert recession, boost economy

Yuan’s stabilizing role highlighted by volatile policies

The Jackson Hole central banking conference in the US is likely to be another venue to witness the economically unsustainable international currency system centered on the US dollar, Chinese analysts noted on Friday, as the market kept a close eye on the meeting to gauge upcoming US Federal Reserve decisions while countries around the world increasingly look for substitutes for the failing system.

Whatever the results of the meeting, US monetary policy moves implemented in the remaining months of 2022 will largely be unable to boost the US real economy or steer the country away from a looming economic crisis, Chinese analysts pointed out, while other countries will increasingly look for a solution from China, which is increasingly similar to the US in terms of economic size but offers more stability in its relations with the world.

Investors will be keen on hearing and gauging how the Fed is going to deal with record high inflation in the US with more interest rate hikes while not deflating the US economy, which many believe is on the verge of a recession, Chinese analysts said.

However, the Fed’s decisions will have little impact on China’s monetary policy, despite the recent formation of a strong dollar trend that is pushing the yuan down a weakening channel.

Lian Ping, head of the Zhixin Investment Research Institute, told the Global Times that the People’s Bank of China recently made clear its determination to pursue a pro-growth track when it lowered the loan prime rate, the market-based benchmark lending rate, on Monday.

The yuan will be the most stable major currency amid the dollar’s general strengthening trend, underpinned by China’s solid economic fundamentals, its sizable international payments surplus, and its strong trade and investment performances, Lian said.

Since the start of the year, the yuan has depreciated against the dollar, but the Chinese currency has been relatively strong compared with other currencies, according to the Economic Daily on Friday.

The Fed’s sizable interest rate hikes have forced many countries to cope by announcing their own rate hikes amid a wave of global inflation. Many countries also face rising financial risks as hot money flows outs and back to the US.

However, such hikes won’t be a cure for the woes of the US economy, even if it means that the US can reap benefits from other countries, Chinese analysts said, noting that the US’ abuse of the dollar’s dominance is causing an increasing reaction.

Mei Xinyu, a research fellow with the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce, told the Global Times that whatever policy the Fed chooses, it’s unlikely to bolster the US’ real economy. Looking at the bigger picture, the dollar-based international currency system is becoming increasingly inappropriate and flawed.