Wen/Wei Xin, Sina Finance North America columnist
Michael Gapen is the Managing Director and Chief Economist of Barclays Bank. He is mainly responsible for analyzing the US economy, paying special attention to the impact of monetary policy and financial markets on the economy. Before 2010, he worked at the Federal Reserve.
During the 24th TCFA annual meeting, Geben had an exclusive conversation with Sina Finance. The following is a transcript of the interview.
Sina Finance: After the Republican Party lost control of the House of Representatives, President Trump's tax cut proposal for the middle class seems to have no chance of being passed. What do you think the impact of this midterm election on the US economy?
Michael Gapen: We think this view is probably correct. Maybe there will be a narrow window to pass the bill before the change of Congress, but we should not see further fiscal stimulus policies or further infrastructure bills. I believe that the deadlock at the legislative level will be a very likely result. Many economists like me and many American investors have begun to have a more firm belief. Most people begin to believe that the economic growth rate brought by the fiscal stimulus policy has peaked or is peaking. From now on to the end of next year, the economic growth rate of the United States should begin to decelerate gradually. If there is no further fiscal stimulus policy, the previous fiscal stimulus program will gradually fade. Split government agencies will gradually increase such expectations.
What I need to propose is that there are two areas that may be uncertain about fiscal policy: the first is the "fiscal cliff" problem, that is, raising the government debt ceiling to provide financial funds for the operation of the federal government. The next budget for government spending will be submitted to Congress in December. Because it is within the authority of this Congress, I don't think there will be any problems. But the debt ceiling will expire in March next year. Since the Republican Party lost its majority in the House of Representatives, I think this will be a risk event.
The second uncertainty is the infrastructure expenditure budget. One view is that we will see the adoption of the infrastructure expenditure budget. I think there is a consensus between Democrats and Republicans that infrastructure spending is needed. The Trump administration certainly wants to pass, and when quoting this proposal, he called it a compatibility idea. But the two parties have fundamental differences on how to make the budget and who will pay for it. The Republican Party prefers a PPP (Public Private Program) scheme. The Democratic Party, on the other hand, prefers to be dominated by the government and then realized by increasing taxes. This means that, in my opinion, the infrastructure bill is unlikely to be passed due to differences in how to achieve the infrastructure budget.
In addition, due to the deadlock in the Congress, the House of Representatives will propose to increase the intensity of the Russian investigation of the President. This will raise the attention of legislators and voters in this regard, and will also reduce the possibility of any infrastructure budget being passed.
Sina Finance: Do you think the current exchange rate of RMB is within the reasonable pricing range?
Michael Gapen: I don't have an official view on the RMB exchange rate, because I am an American economist. But I can tell you that the exchange rate may gradually weaken and may break 7. I don't know what the reasonable price is? The short-term direction is that the pressure of RMB depreciation will gradually rise. In the long run, if the world economic and trade relations become increasingly distant, the RMB will also face long-term depreciation pressure.
Sina Finance: After the tax reduction plan is passed and consumers get more tax rebates, what will the US holiday season look like last year?
Michael Gapen: This year's holiday should be good. I don't have a holiday season sales growth compared to last year, I usually give this part of the work to our industry analysts. But from a macro perspective, last year's tax cut program gave ordinary families more resources; The employment situation is quite good, many people have been added to the payroll; The wealth effect brought by the stock market rise in the presidential election; Data analysis tells us that household savings have increased a lot. Many factors tell us that the current strong consumption momentum will continue. I believe we will see a lot of good data in the holiday season.
Sina Finance: You expect that the Federal Reserve will raise the benchmark interest rate by 0.25% again in December. What are your expectations for the monetary policy of the Federal Reserve next year?
Michael Gapen: Our view is that the Federal Reserve is planning to gradually increase the benchmark interest rate by another 1.25 percentage points by the end of 2019. The fiscal stimulus makes it relatively easy for them to maintain this trend, because it will keep the US economy running above the trend and keep the US labor market healthy.
We have obtained evidence that raw material prices and wage costs are beginning to rise. Even if the overall inflation remains within the set target of the Federal Reserve, raw material prices and wage costs are still rising. For us, we believe that the Federal Reserve will raise interest rates again in December and four times next year. But we think the best time for the Federal Reserve to raise interest rates is not 2019. Because at that time, the fiscal stimulus policy began to fade, and employment growth began to be weak. These are the two main considerations of the Federal Reserve's monetary policy. Economic growth will gradually decline in 2019 and 2020, because monetary policy will become tight at that time.
Although we believe that the Federal Reserve will raise interest rates five times, the market believes that this expectation is too optimistic. We still maintain our expectations.
Sina Finance: After the strong employment growth in the United States, more and more people are able to buy houses. However, in the past year, we have observed an obvious adjustment of house prices in many cities in North America. What do you think causes this phenomenon?
Michael Gapen: I think the main reason for the sluggish growth of housing prices is the affordability of residents. Housing loan interest rates have been rising in the past 18 to 20 months. The growth rate of housing prices after the recovery has exceeded the growth rate of disposable income of residents. So it is much more difficult to buy an ordinary house than before. The cost of owning a house has also increased a lot. In the early stage of economic recovery, the historic high affordability has gradually declined in the past few years and has begun to approach the long-term average level. This is why I think the price of real estate has declined.
But the good news is that in our view, housing prices did not rise excessively as in the previous cycle. We believe that the long-term natural real estate inventory is about 1.2 to 1.3 million sets. When we add this number, we do not think that the real estate industry has increased excessive inventory. Nor did we see a large number of new houses lying idle or waiting to be sold. Therefore, if you see a price correction in one or two months or even a quarter in the future, you don't need to worry that this is a major trend of price correction. We believe that housing prices are in a relatively high range, coupled with the increase of real estate tax due to the transformation of taxes into part of high priced housing, the affordability of residents begins to decline.
We do not hold a negative view of the real estate industry, but we do believe that residents' affordability is a problem.
Sina Finance: Many private business owners complain that the labor market is too tight. Even Greenspan said he had never seen such a tight labor market before. Do you think this will hurt the US economy or benefit the US economy to some extent?
Michael Gapen: The benefits are obvious. As more people enter the workplace and labor groups, the scars caused by the last economic crisis are being cured. In the economic cycle, people are always unemployed and re employed. But what you need to worry about is that those who are in the long-term workplace may become long-term unemployed once they are laid off. With the tension of the job market, the social scars caused by long-term unemployment are receding.
However, it is worth noting that at the end of the economic cycle, the government suddenly increased such a large fiscal stimulus, in fact, it is bearing the risk of the sudden bursting of the economic bubble. The excessively strained labor market will stimulate the sharp price rise feared by the Federal Reserve, which will make them feel that they must combat this trend. Now the overall inflation does not feel out of control, and raw material prices and wage costs are beginning to rise. But from the historical level, these are still in a relatively low space. The wage increase of 3.1-3.2% is relatively low compared with that of at least 4% in the previous cycle.
From the perspective of input and output prices, there is not much evidence that the economy is overheating. But under the premise of such strong fiscal stimulus policy and labor market, the Federal Reserve began to say that we want monetary policy to become tight. When long-term yields start to rise, you begin to feel that the possibility of economic recession is increasing.
So a strong labor market can heal the historical scars, but if too many good things are added together, you will actually bear the risk of a long-term economic recession.
(The author of this article is a columnist who once worked for a large mutual fund management company in the United States.)
