<h2>The Relationship Between Monetary Policy and Macroeconomic Policy</h2>
In the past year, the actual policy interest rate has significantly decreased, with the one-year time deposit rate dropping from 2.41% to 1.61%, a decrease of 80bp.
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However, inflation data has shown little improvement, with core CPI growth at only 0.30%.
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This data pattern can tame our intuition, leading us to conclude that monetary easing has weak support for the economy.
So, where exactly is the problem? We only consider one aspect of the issue—what monetary policy has done—without considering the other aspect—what the economy needs monetary policy to do.
The neutral interest rate is used to assess the latter. Its definition is as follows: if a policy interest rate R* neither imposes restrictions on the economy nor provides support to the economy, then this interest rate is the neutral interest rate.
Generally, we can simply estimate the potential position of the neutral interest rate using the ten-year government bond yield. Whether it is real estate stimulus policies or fiscal stimulus policies, both can infer the position of the neutral interest rate.
Therefore, the difference between the neutral interest rate and the policy interest rate has important economic implications—redundancy of macroeconomic policy, in a neutral scenario:
<ol>
<li>If other economic policies are implemented extensively, monetary policy needs to do less;</li>
<li>If other economic policies are implemented minimally, monetary policy needs to do more;</li>
</ol>
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Thus, we have the above diagram, where monetary policy fills the gaps left by other macroeconomic policies, with three scenarios for the gaps: 1. Easing; 2. Steady; 3. Tightening.
If a steady monetary policy is to be implemented, then the difference between the neutral interest rate and the policy interest rate should not be too large; if an easing monetary policy is to be implemented, then the difference between the neutral interest rate and the policy interest rate should be widened.
<h2>Steady Monetary Policy and Its Implementation Status</h2>
In the article &#34;What is Moderately Easing Monetary Policy??&#34;, we discussed the specific meaning of steady monetary policy.
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Under the framework of steady monetary policy, the actual policy interest rate should closely follow the movements of the neutral interest rate, allowing the annual policy interest rate to fluctuate narrowly around the neutral interest rate.
<img src="https://imageproxy.pbkrs.com/https://bang.xuangubao.cn/LTI4ODAzNjE=?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://bang.xuangubao.cn/LTI4ODAzNjE="/>
Understanding this principle, we can comprehend why the term &#34;precise&#34; is repeatedly emphasized in a prudent monetary policy (ps: The screenshot is taken from the transcript of the 2023 Central Economic Work Conference, with next year referring to 2024).
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In fact, the central bank has effectively implemented a prudent monetary policy, the control of policy interest rates is very precise, with the average term spread for the entire year of 2024 being around 10bp.
Since the difference between the neutral interest rate and the policy interest rate describes the redundancy of macro policies, a long-term implementation of a prudent monetary policy (ps: for 14 years) will inevitably suppress the inflation rate.
<blockquote>
Inflation actually describes the redundancy of macro policies.
</blockquote>
<img src="https://imageproxy.pbkrs.com/https://bang.xuangubao.cn/MzQxMDYzNTUx?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://bang.xuangubao.cn/MzQxMDYzNTUx"/>
As shown in the figure above, in the past 14 years, except for the second half of 2019 when the pig fever caused CPI readings to soar, China's CPI has generally maintained a fluctuating downward trend.
The fundamental reason lies in our effective control of money supply, precisely preventing it from generating redundancy.
However, many things have dual aspects. Before 2020, low inflation brought us a good experience; in the past two years, low inflation has led to very negative social evaluations.
<h2>Loose Monetary Policy and Its Impact</h2>
<img src="https://imageproxy.pbkrs.com/https://bang.xuangubao.cn/Mjg3NzY2MjEz?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://bang.xuangubao.cn/Mjg3NzY2MjEz"/>
The topological structure in the figure above tells us that the relationship between other macro policies and monetary policy is asymmetric, monetary policy is the part that determines the redundancy. Therefore, what kind of monetary policy to implement is the core of everything.
<img src="https://imageproxy.pbkrs.com/https://bang.xuangubao.cn/LTU1ODU5ODMxMQ==?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://bang.xuangubao.cn/LTU1ODU5ODMxMQ=="/>
As shown in the figure above, a moderately loose monetary policy is to be implemented in 2025 (ps: The screenshot is taken from the transcript of the 2024 Central Economic Work Conference, with next year referring to 2025). If we do not understand the asymmetric relationship between other policies and monetary policy, it will be difficult to grasp the accurate meaning of &#34;moderately loose,&#34; and we will only focus on more specific terms like &#34;reducing the reserve requirement and interest rate cuts.&#34;
So, what does a loose monetary policy look like? We can refer to the United States in 2020.
<img src="https://imageproxy.pbkrs.com/https://bang.xuangubao.cn/LTMzMzU4NTYyNg==?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://bang.xuangubao.cn/LTMzMzU4NTYyNg=="/>
After the outbreak of the pandemic, the U.S. government quickly raised the policy spread to around 80bp and maintained the corresponding macro policy strength for a year. Later, as the U.S. economy recovered, the macro policy did not retreat, and the term spread rose to around 150bp, continuing for another year. Subsequently, the U.S. experienced relatively high inflation, primarily due to the late interest rate hikes in 2021
The experience of the United States tells us that to create inflation, we first need to have sufficient macro policy redundancy and maintain it for a period of time. However, a robust monetary policy itself is an anti-inflationary monetary policy, making it difficult to generate inflation within this policy framework.
<img src="https://imageproxy.pbkrs.com/https://bang.xuangubao.cn/MTY1MDg5OTM3Mg==?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://bang.xuangubao.cn/MTY1MDg5OTM3Mg=="/>
In the fourth quarter of this year, the Federal Reserve cut interest rates 3 times, with a total reduction of 100 basis points. If we describe the situation in the United States using our terminology, it would be: through this round of interest rate cuts, the United States has switched from a tightening monetary policy to a robust monetary policy.
In other words, in the future, the U.S. policy interest rate must follow their neutral interest rate; otherwise, it will be difficult for them to fully control inflation.
<h2>Strength of Macro Policy and Its Impact</h2>
Once we eliminate the error of &#34;one-sidedly viewing a certain type of macro policy&#34; and find the &#34;acceptable comprehensive indicator,&#34; everything becomes clear.
<blockquote>
The key is the policy interest rate spread, which is the difference between the neutral interest rate and the policy interest rate.
</blockquote>
Here, a metaphor from everyday life can help us integrate our intuition. To make a car climb a long slope at a faster speed, we need to press the accelerator deeply—a larger policy interest rate spread—and we also need to keep pressing the accelerator continuously—maintaining a high policy interest rate spread for a long time. Both are indispensable.
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Thus, we have found a tool to assess the strength of macro policy—the area enclosed by the interest rate spread curve and the zero axis. As shown in the figure above, an accommodative monetary policy corresponds to a strong macro policy strength.
<img src="https://imageproxy.pbkrs.com/https://bang.xuangubao.cn/MTM4Nzk1ODk5?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://bang.xuangubao.cn/MTM4Nzk1ODk5"/>
Conversely, a robust monetary policy corresponds to a weaker macro policy strength.
To reflect the time accumulation effect of macro policy, we can simply depict the strength of macro policy using the 60-day moving average of the term interest rate spread.
<img src="https://imageproxy.pbkrs.com/https://bang.xuangubao.cn/LTg1Mzk1Nzc5?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://bang.xuangubao.cn/LTg1Mzk1Nzc5"/>
Currently, the overall strength of macro policy is around 18 basis points, which is relatively weak. Referring to the experience of the United States in 2020, we need to raise the strength of macro policy to levels of 80 basis points or even 150 basis points.
<blockquote>
Without pressing the accelerator, the car won't climb the slope by itself.
</blockquote>
Conclusion
Recently, many people have complained that despite so many policies, the inflation data has remained sluggish since the fourth quarter, and the micro experience is still poor.
<img src="https://imageproxy.pbkrs.com/https://bang.xuangubao.cn/LTQ0MDE0NjAzNw==?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://bang.xuangubao.cn/LTQ0MDE0NjAzNw=="/>
In fact, their narrative deviates from the actual situation. If we look at the problem from the perspective of macro policy strength, the real situation is quite different. As shown in the figure below, the domestic term interest rate spread has remained low throughout the fourth quarter, **which means we are still under a robust monetary policy framework
**
<img src="https://imageproxy.pbkrs.com/https://bang.xuangubao.cn/MTcxNDkwNjc4Mg==?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://bang.xuangubao.cn/MTcxNDkwNjc4Mg=="/>
Therefore, many policies are still &#34;expectation-based policies.&#34; The main task in Q4 this year is not to directly enter an accommodative monetary policy, but to prepare for a policy shift next year.
<blockquote>
The larger the ship, the slower it turns, but everything is ready except for the east wind.
</blockquote>
<img src="https://imageproxy.pbkrs.com/https://bang.xuangubao.cn/MTkxODc0NDY5Ng==?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://bang.xuangubao.cn/MTkxODc0NDY5Ng=="/>ps: Data from Wind, images from the internet
Risk warning and disclaimer
The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at your own risk

The macro policy outlook for 2025 indicates that the relationship between monetary policy and the economy is complex. Although the actual policy interest rate has significantly decreased, inflation data has not shown improvement, with core CPI growth at only 0.30%. The assessment of neutral interest rates shows that monetary policy needs to be adjusted based on the implementation of other economic policies to achieve robust or accommodative policy goals. A prudent monetary policy should closely follow fluctuations in neutral interest rates, ensuring that the gap between the policy interest rate and the neutral interest rate remains moderate

- The article discusses the relationship between monetary policy and macroeconomic policy, highlighting a significant drop in actual policy interest rates while inflation remains low.  
- It emphasizes the importance of the neutral interest rate in assessing the effectiveness of monetary policy, suggesting that the difference between the neutral and policy rates indicates the redundancy of macroeconomic policies.  
- The author argues that a robust monetary policy should closely follow the neutral rate, and current low inflation reflects effective control over money supply, while future policies may need to shift towards moderate easing to stimulate the economy.

Outlook for Macro Policy Strength in 2025: 18bp to 80bp?