High interest rates in the U.S., ‘risk of additional fiscal stimulus hike’, Lee Chang-yong’s ‘geopolitics’, intensive blow to Korean won

High interest rates in the U.S., ‘risk of additional fiscal stimulus hike’, Lee Chang-yong’s ‘geopolitics’, intensive blow to Korean won

As the U.S.'s policy of prolonging high interest rates and the Korean government's strategy of 'repeating short-term expectations' relying on the stock market stimulus is coming to naught, the won's weakness, which has no defense against the slowdown in consumption and high prices, is focused.
In the high wage structure, the US high interest rate policy requires US investors to invest in government bonds, while Korean officials and the stock market used it ahead of time to 'cut US interest rates', and the US Federal Reserve announced on the 5th that 'further interest rate hikes are possible if fiscal stimulus is implemented'. After this, the Korean financial market became the target of intensive attacks.
U.S. Federal Reserve President Michel Bowman said on this day, “FOMC members in September expected fewer interest rate cuts in 2024 and over the next two years than in December, and some included higher long-term federal funds rates than in the past.” “In order to return inflation to 2% in the long term, the policy interest rate must be raised further in the future,” he said.
In an announcement from the Manhattan Institute, Governor Bowman said, “We continue to see the risk that we may have to raise the policy interest rate further if inflation stagnates or even reverses at future meetings,” and said, “Inflation is likely to rise further,” referring to upside risks other than supply chain and geopolitical variables. “The risk is additional fiscal stimulus or an increase in the spending ratio of existing and new expenditures,” he said.
In particular, he said, “Some of the recent policies may increase production capacity in the medium term, but they may also increase aggregate demand and increase inflationary pressures,” and stated that the reason for the further increase in interest rates was ‘fiscal expansion.’
Bank of Korea Governor Lee Chang-yong told CNBC in Washington on the 16th, “Not only the strength of the U.S. dollar, but also geopolitical tensions in the Middle East have had an impact,” adding, “The weakness of the Japanese yen and Chinese yuan are also playing a role. Volatility has been somewhat excessive recently. “If necessary, we will take stabilization measures,” he said, citing ‘geopolitics as the exchange rate surge’.

U.S. Federal Reserve officials repeatedly broke the interest rate cuts that investors had been expecting and signaled to ‘wait more’, and the Consumer Price Index (CPI) on the 16th As U.S. stocks plummeted and Korea's won plummeted due to prolonged high interest rates and high inflation, the strong dollar hit of 154 yen per dollar was revealed to be concentrated in Korea.
In the United States, the 'early interest rate cut' was mainly promoted by investor circles, while in Korea, the government and economic experts took the lead in using the 'US interest rate cut' as a basis for 'short-term economic stimulus policy', and the blow was due to high consumer prices and high exchange rate in the currency market. I was focused.
The New York Times reported on the 12th that many economists are more concerned about a “no-landing” instead of the “soft landing” (moderate inflation slowdown) previously considered.
Analysts are increasingly alarmed that the U.S. economy is not getting off the ground, and with prices rising faster than usual, the economy appears to be booming rather than stabilizing.
As for the "no-landing," the NYT explained that inflation among American households is not as high as its 2022 peak, wages are rising and jobs are plentiful.
The US Federal Reserve's decision to return the inflation rate to its target of 2% is causing serious problems.
Due to the US Federal Reserve's inconsistency with price stability, the S&P 500 index fell 1.6% on the 16th, having its worst week so far this year.
In the United States, inflation on a monthly basis has risen slightly since the end of last year, and the food perceived by consumers has decreased, while in Korea, food has increased intensively.
In Korea, consumer prices for agricultural products soared 20.5% in March compared to the same month last year, and apples soared 88.2%.
In March, CPI rose 3.1% in Korea, 3.5% in the U.S., and 2.5% in the euro area, and the rate of increase compared to the previous low was higher in Korea at 0.7% and 0.5% in Korea.
In the United States, where inflation is concentrated in specific categories and specific consumers, car owners saw a 22% increase over the past year due to increased gasoline prices, increased repair costs, and increased insurance premiums.
In contrast to Korea's worsening poverty among middle-aged and older workers, the U.S. labor market continues to beat expectations, adding nearly 3 million jobs over the past year, up from more than 300,000 in March.
The U.S. unemployment rate has remained below 4% for more than two years, the longest since the 1960s.
U.S. food prices have remained stagnant for two months and have risen only 1.2% over the past year.
Prices for furniture, appliances and many other durable goods in the U.S. are falling, and rent increases that have pressured consumers are being eased or even reversed in many markets.
“Inflation is still too high, but inflation is much less widespread than it was in 2022,” said Ernie Tedeschi, a Yale Law School researcher who was an economic official in the Biden administration, diagnosing the change in economic conditions in which high prices were “limited to certain categories.”
U.S. wages are still rising, no longer at the breakneck pace of the early recovery, but closer to what economists consider sustainable and, crucially, faster than inflation, the NYT said on the 15th.
Rising incomes have allowed Americans to continue spending even as their savings during the pandemic have dwindled, restaurant business is booming and spending at retailers is not slowing down.
Regarding the policy of maintaining high interest rates, the NYT said, “American consumption faced a record year-end holiday season at the end of last year, and many companies expect it to grow this year as well,” adding, “Consumer spending helped promote the acceleration of overall economic growth in the second half of last year. , growth appears to have continued, albeit at a slowdown, in the first quarter of 2024. At the same time, single-family home construction, which had suffered last year, has increased in recent months despite high interest rates, manufacturers are reporting more new orders and factory construction is partly due to the semiconductor industry. “There has been a surge due to federal investment in,” he said.
The high interest rates in the United States provided additional grounds for ‘long-term’ in policymakers’ prescriptions, given that inflation is too high, unemployment is low, and growth is robust.
In direct contrast to the United States, Korea attempted to induce investment and stimulate consumption by making 'early implementation of a U.S. interest rate cut' a domestic ideology, and the exchange rate became the target of intensive attacks amid the prolonged high inflation and slowdown in consumption.
“Framework for Monetary Policy, Regulation, and Bank Capital,” a presentation by Federal Reserve Governor Michelle Bowman’s Manhattan Institute for the Spring 2024 Shadow Open Market Committee Meeting, was published on the Federal Reserve website.
Governor Bowman said on this day, “At the recent FOMC meeting, we supported maintaining the target range for the federal funds rate from 5-1/4% to 5-1/2% and continuing to reduce our stock holdings,” adding, “However, the policy rate is not yet in place.” “The appropriate point has not been reached to cut the interest rate, and we continue to see various upside risks to inflation,” he disclosed about ‘upside interest rate risks.’
NYT reports that investor expectations of interest rate cuts were a big factor in the rise in stock prices in late 2023 and early 2024, and now that the outlook for interest rate cuts has dimmed, this rally has lost momentum, and further delays pose problems for stock investors. He said he could do it.
At the interest rate freeze press conference on the 12th, Governor Lee Chang-yong was asked, "Will the Bank of Korea consider the option of lowering the benchmark interest rate before the U.S. Federal Reserve?" and responded, "It is true that the U.S. interest rate cut will be delayed more than originally expected," adding, "The U.S. will raise interest rates." In the past, monetary policy was greatly influenced by the U.S. monetary policy because there were restrictions on exchange rates, etc., but now the impact on monetary policy is different from before and it is becoming decoupled globally, so the Bank of Korea is not necessarily following the U.S., but consumers “The capacity to implement monetary policy considering domestic factors such as inflation rate and exchange rate impact has increased compared to last year,” he said.
He continued, “In a situation where the U.S. has given a pivot signal, there is greater consideration of the domestic inflation rate, so (interest rate cuts) may be done before or after the U.S. accordingly.”
Korea's consumer price inflation rate in March was 3.1%, up 0.7 percentage points from the previous low of 2.4% in July of last year.
The U.S. consumer price inflation rate rose 0.5 percentage points from the annual low of 3.0% in June last year to 3.5% in March. Eurozone prices remain low, recording 2.4% in March, up from 2.4% in November last year.
In April, Korea ‘frozen the interest rate at 3.5% for 15 consecutive months’, maintaining the largest interest rate gap in history (2.0%p) with the US interest rate of 5.25-5.50%.