The Federal Reserve System, commonly known as the Federal Reserve, is the central banking system of the United States, and unlike most central banks on Shijie, the Federal Reserve is a private banking system composed of more than 3,000 member banks, and the U.S. government does not own shares in the Federal Reserve. It's just that more than ninety percent of the Fed's profits are paid to the U.S. Treasury every year, and all of the Fed's senior employees are appointed by the U.S. government.

The Federal Reserve has three committees, namely the Federal Reserve Board, the Federal Open Market Committee, and the Federal Reserve Bank. The most powerful of these is the Federal Reserve Board, whose seven members are nominated by the president and approved by the Senate, and all of them are permanent members of the Open Market Committee, who determine the "reserve ratio" and "discount rate" of member commercial banks, and have an absolute numerical advantage in the 12-member Federal Open Market Committee, which can determine market interest rates.

In addition to the two institutions mentioned above, there is also a Federal Reserve Bank system. In the United States, the law requires National Banks (commercial banks registered with the Office of the Comptroller of Inflation) to join the Federal Reserve Bank system, while commercial banks registered in the states are exempt from the Federal Reserve's jurisdiction. However, in fact, because the assets of the commercial banks under the Fed occupy an absolute amount in the market, those commercial banks that do not join the Fed have to be on par with the Fed in various policies.

The central bank has three magic weapons to regulate the market, namely the interest rate, the discount rate and the rediscount rate, and the reserve requirement ratio, all of which are determined by the Federal Reserve Board, plus the absolute strength of the US dollar on the shijie. As a result, the chairman of the Federal Reserve Board is known as the most powerful man on Shijie, and almost all financial institutions depend on his snort for survival.

Alan Greenspan is one such person!

On January 21, 94, Greenspan came to the White House, the Fed chairman came to the D.C. to visit President Clinton, and he brought with him a special purpose, which was to raise interest rates.

At this time, the United States, stimulated by low interest rates, has achieved a year and a half of economic growth, which is almost everyone's favorite. But the Fed, which has been keeping a close eye on the market, finds that the U.S. may soon enter a dangerous inflationary situation due to excess liquidity in the market due to low interest rate policies. After discussing with colleagues. Greenspan made the decision to raise interest rates, this time in Washington, to inform the president and his staff team.

"Rate hike? You're not kidding me, are you? As Mr. Greenspan had predicted, the first reaction of government officials with little economic knowledge was Vice President Al Gore, this time speaking out. Although he has a large team of economic staff behind him. But no one expected that the Fed would make the decision to raise interest rates at this time.

The vice president's skepticism is justified. In the history of the United States. Each small rate hike usually means the beginning of a rate hike cycle, and the market has formed such an expectation. If this expectation is eventually realized, long-term interest rates will rise sharply as a result. The end result is a collapse of the bond market, which will inevitably lead to a "hard landing" of the economy.

A hard landing in the economic sense refers to the fact that in the process of controlling inflation, economic growth stagnates due to the contraction of credit, liquidity and other factors, or even presents a recession. The corresponding is a soft landing, that is, in the process of controlling inflation, the growth of the economy can still maintain a moderate growth.

As for the vice president's question, Greenspan had already fully considered this issue before coming to the D.C., and in fact, in his view, the primary concern at present is not the bond market, but the performance of the stock market. Now that the S&P 500 has reached around 470 points in history, it's time for a correction.

"As you may not know, Mr. Vice President, long-term interest rates are primarily influenced by inflation expectations. If we raise interest rates at this time, the market will understand that we are vigilant enough to change prices, so that the market's inflation expectations will inevitably fall, and in turn, long-term interest rates will fall. Personally, I think this rate hike is good news for the bond market. Greenspan said eloquently.

He is naturally qualified to say this, considering that he had been working as an economic adviser at the Reserve Bank of New York before he became chairman of the Federal Reserve, and he has been immersed in the market for far more time than those economic chiefs of staff, and he has naturally considered the market's reaction more comprehensively than these people.

The long-term interest rate is the interest rate of financial assets with a financing period of more than one year, and the long-term and short-term interest rate in the capital market is usually limited to one year. Due to the strong liquidity of treasury bonds, the yield of long-term treasury bonds is usually used as an indicator of long-term interest rates, of which the yield of 10-year treasury bonds is the vane of the global economy and financial markets, and also determines the direction of long-term interest rates.

It must be noted that the Fed has a high degree of independence in making decisions on the economy, as if Grispan came to the White House this time, and his task was to inform the relevant people in the administration of the Fed's imminent decision to raise interest rates and the reasons for the rate hike in order to convince the government. Even if government officials disagree, the Fed will eventually raise interest rates.

"I hope so!" Gore glanced back at his economic adviser, and after seeing that Tyson, a female economist from the University of Berkeley, shook her head slightly, she turned her head and looked at Greenspan deeply, "I hope the market won't react too sensitively to this." ”

Greenspan's wrinkled face suddenly smiled, he was naturally very satisfied that he could convince the government in this way, and the rest was the Fed's own business.

Two weeks later, on 4 February 1994, after chairing the Open Market Committee, Greenspan recommended a smaller rate hike to curb market expectations for inflation, which was set at 25 basis points, or 0.25%.

It should be noted that the Fed's way of adjusting interest rates is achieved through adjustments to the federal funds rate, which is formed by the Fed member banks to adjust reserve positions and daily bill exchange netting, which is made up of excess reserves and surpluses from bill exchange netting from member banks. Since federal funds lending is not secured. The interest rate is lower than the official discount rate, so the fund borrows a lot of money. Over time, the interbank rate on this fund became the U.S. interbank rate.

Because of the risks associated with bank operations, the laws of almost all countries stipulate that banks must hand over a portion of depositors' funds to the central bank after absorbing them, which is called a reserve fund, in case they compensate depositors in the event of future bankruptcy. Commercial banks often reserve a part of the funds in this process, which is called excess reserves.

Because the bank's deposit and loan funds change every day, there may be a surplus or lack of statutory reserves every day, and at this time, you can borrow or lend funds from other banks, forming an interbank lending market. The interest rate at which the loan is offered in this market. Even if it is a day (overnight), there is an interest rate, that is, the interbank interest rate.

When the Fed raises the rate of call in federal funds, commercial banks that lend to the Fed may turn to other commercial banks to lend money, but the Fed can sell Treasuries in the open market. Absorb the excess reserves of other commercial banks. By doing this repeatedly. Eventually pull the interest rate in the market to where they want it to be.

In China, it is very different, basically when the central bank monitors the market, it finds that it is necessary to raise or lower interest rates. Often a single piece of paper solves the problem. This kind of non-market-oriented behavior is extremely harmful, because the cost of funds is not determined by supply and demand, and it is often particularly harmful to the real economy before and after adjustment.

Having said that, the reason why the Fed raised interest rates by 25 basis points this time is to correct the market by a relatively "gentle" range, because for a market of hundreds of billions of dollars, such a rate hike is already strong enough to affect the market.

Only this time Greenspan was wrong in his assessment of the bond market, in fact, when the Fed announced a rate hike, the S&P 500 index fell from 480 to 469 points, a heavy drop of 2.27%, and in the following period of time, as he expected, began to enter the correction channel, once fell to 435 points, at least from the stock market, his logic is successful.

In the long-term interest rate market, Greenspan's original assumption was to dispel the market's inflation expectations by raising interest rates, that is, due to the decrease in expectations leading to a decline in long-term interest rates, the return on investing in long-term Treasury bonds will eventually rise. But thanks to the rapid growth of hedge funds in recent years and the shadow banking system formed by heavily leveraged between long-term and short-term interest rates, the bond market has not worked as well as he thought.

As mentioned earlier, hedge funds are far from being able to meet the small amount of income they can make from investing in bonds, so they build positions in the Treasury futures market on a large scale, and because the volatility of Treasury prices is very small, these hedge funds can use extremely high leverage, generally as much as 100 times. That is, a long-term Treasury bond with a face value of $1 million can be bought and sold in the futures market for only $10,000, and greedy hedge funds are not even willing to give out the $10,000, but lend the $10,000 through a broker.

When doing the right market, there is no problem with this kind of lending relationship, but if the direction is completely opposite to the market, then the broker will inevitably require more margin in order to avoid risks, so that hedge funds will inevitably reduce their positions in order to avoid the risk of inflation and maintain margin.

The question is, no other market can accommodate as much money as the bond market (except the money market), and if hedge funds are swarming to sell bonds, who will take over? In this way, there are fewer people who take orders than those who sell, so the seller will inevitably compress the price again and again in order to make a deal, and eventually the price of bond futures and even bonds will fall to an incredible level, and even cause a crash of the entire market. When the time comes, these hedge funds may lose all their money!

All of this stems from a larger-than-expected interest rate hike by the Federal Reserve! (To be continued......)

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