At the "Golden Qilin Forum · Financial New Departure 2025" held on January 15th, former Chairman of the Supervisory Board for Key State-owned Financial Institutions at the China Banking Regulatory Commission, Mr. Yu Xuejun, delivered a speech addressing the current domestic monetary environment. Mr. Yu Xuejun stated that if the United States continues to cut interest rates this year, its economy will face significant financial risks. He argued that from a historical perspective, the current US interest rate level is not high and is appropriate. Why does the US experience cyclical financial crises? The most critical reason is that markets often generate bubbles, which fundamentally stem from monetary and credit expansion, meaning monetary policy is often managed too loosely. Summarizing this history, what should the reasonable neutral interest rate be? It is generally believed to be around 5.5% or higher. This represents an academic consensus with a certain degree of acceptance. Maintaining interest rates below the neutral level for too long releases excessive liquidity, inevitably leading to the formation of bubbles. Currently, interest rates in the US and Europe are actually below the neutral level. Further reductions will, in the long run, certainly create bubbles and lead to adverse consequences. We can wait and see this unfold; it is imminent and will manifest within three years. There is currently significant debate about whether an AI bubble exists or will emerge, with opinions divided. Scientists represented by NVIDIA's Jensen Huang argue that there is no AI bubble at all, asserting that AI is a major technological innovation, a tangible and reliable infrastructure with a promising and boundless future. However, I want to emphasize that a bubble is never solely a question of technology, industry, or material factors; it is fundamentally a monetary phenomenon. The fact that technological innovation is real does not automatically preclude the formation of a bubble; these are two distinct concepts. The following is a transcript of the speech: Yu Xuejun: Thank you, moderator. Distinguished guests, friends: Good afternoon! I am delighted to participate in the annual Golden Qilin Forum hosted by Sina Finance. I will primarily share one perspective: the current US interest rate level is already very low, and further reductions will pose significant long-term risks. Starting with the Federal Reserve's rate cut last December, this was the sixth reduction since September 2024, bringing the federal funds rate to 3.5%-3.75%. It is widely known that both major central banks in the US and Europe are in a rate-cutting cycle and will certainly lower rates further this year. This requires a look back at history to understand what the appropriate neutral interest rate for the US should be. Reviewing the US post-WWII economic history reveals that every bubble formation and crisis outbreak was preceded by a process of continuous monetary and credit easing, expansion, and accumulation—this is a fundamental condition. During the 1990s, Fed rates fluctuated around 3%, 6%, 4.75%, and 5%, eventually rising to 6.5% during the Asian Financial Crisis. While these rates may not seem low compared to today, given the historical context of that time, they were largely too low or maintained for excessively long periods. The final rate of 6.5% was certainly not low, but it was sustained for a very short time. Understanding this point is crucial as it forms the basis for comprehending the issues we face today. After the dot-com bubble burst, the US economy fell into recession. Starting in early 2001, the Fed rapidly cut rates. Following the severe impact of the 9/11 terrorist attacks, the rate cuts intensified. In less than two and a half years, from early 2001 to June 2003, the Fed cut rates rapidly from 6.5% to 1%, maintaining this level until June 2004. This approximately four-year period of low interest rates in the US fostered a massive bubble, setting the stage for the international financial crisis that began in 2007, or indeed being a primary cause of the crisis. After the subprime mortgage storm, a book titled "Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve" highlighted that Alan Greenspan's error was cutting rates too aggressively and maintaining excessively low rates for too long. During his roughly 19-year tenure, he presided over both the stock market and real estate bubbles, each lasting about a decade. These criticisms were not only voiced after the international financial crisis but were frequently raised in commentaries during Greenspan's term. In today's terms, it was constant critique. We lived through that period; it is a fact. Reflecting on this history, we must understand why financial crises occur cyclically. The key reason is that markets frequently generate bubbles. Why do bubbles always appear? The most fundamental cause is monetary and credit expansion—monetary policy is often managed too loosely. The crucial questions are how to properly control monetary credit and what the neutral interest rate truly is. Summarizing this history, it is generally believed to be around 5.5% or higher. This represents an academic consensus with a degree of acceptance. Keeping rates below the neutral level for too long releases excessive liquidity, inevitably leading to bubbles. Of course, the neutral rate is not static across different historical periods and even carries some uncertainty. Overall, however, its changes are slow and trending downward. Looking at the past 50 years, this is the general trend. The current neutral rate should be above 4%, or perhaps between 4.5% and 5%. Using 4% as a benchmark, current US and European rates are already below the neutral level. Further cuts will, in the long term, certainly create bubbles and adverse consequences. We can wait and see this unfold; it is imminent and will manifest within three years. Returning to the present, within this US rate-cutting cycle, Fed Chair Jerome Powell has been relatively conservative, based on his professional judgment and responsibilities. After the December Open Market Committee meeting, he clearly stated he expects only one more rate cut this year. However, former President Trump has demanded significant rate reductions. With Powell's term ending in May, Trump's selection of a new chair is premised on finding someone aligned with his view for substantial cuts—a major variable for the Fed this year. Consequently, predictions for the number of future rate cuts are now sharply divided. Whether it's one cut, three, or more, the broader pattern is set: the US benchmark rate is already significantly below the neutral level. The danger in this situation is that, in the short term, inflation control targets might be difficult to achieve, while in the long term, it will certainly accumulate a massive bubble, forming new risks. Finally, on a related topic, there is significant debate about whether an AI bubble exists or will emerge, with opinions divided. Scientists represented by NVIDIA's Jensen Huang argue that there is no AI bubble at all, asserting that AI is a major technological innovation, a tangible and reliable infrastructure with a promising and boundless future. But I want to emphasize that a bubble is never solely a question of technology, industry, or material factors; it is fundamentally a monetary phenomenon. The fact that technological innovation is real does not automatically preclude the formation of a bubble; these are two distinct concepts.
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