Even within the Federal Reserve, it seems like a civil war is brewing. We might witness a situation where the cracks become more pronounced. You mentioned political issues; if it is true that they tried to lower interest rates due to political pressure, it resembles the 1970s. While it is possible to lower interest rates when political issues influence monetary policy, such problems could resurface. I believe that the changes in U.S. growth and the sensitivity to interest rate hikes are significant factors.

Hello, this is the Monthly O Geon-young segment. The long-awaited interest rate cut has finally arrived after four years, but it seems to be more tranquil than expected. I'm not sure what has changed, and it feels a bit confusing. However, unbeknownst to us, a big wave is approaching from afar.

You might not know, but we have gathered today to discuss the flow of changes that we need to read. Today, we will talk with the head of Shinhan Bank, Mr. Ko Hyun. Welcome, sir. 

Hello, thank you. You must be really busy these days. 

Yes, indeed. With the recent 50 basis point cut, it seems there are more inquiries coming in. I would also like to ask about the current situation, but we have a lot to discuss, so let's get straight to the point. It has been about a week since the rate cut, so many subscribers have probably seen the analysis from Head Oh Kwon-young. I wanted to touch on the latest news briefly. This week, there were some comments from the Federal Reserve officials. For example, regarding military procurement, they mentioned that there is still a long way to go to determine the neutral interest rate, indicating that they are keeping the possibility of further rate cuts open.

However, if we talk about the most important director, it would be Michelle Bowman. She was the only director who opposed the interest rate cut, so I was very curious about what she would say. She mentioned that a 50 basis point cut might have been a bit hasty and also pointed out that the core PCE inflation is still somewhat uncomfortably high. I’m interested in your analysis of these remarks. 

Well, first of all, I think the structure of the Federal Reserve itself is significant. I was a bit surprised to see Governor Bowman oppose this time. One reason for my surprise is that it is not uncommon for regional bank presidents to cast dissenting votes. This often happens because they represent the interests of the banks in their regions, which can frequently reflect the industries in those areas. However, now...

The fact that a Federal Reserve Board member cast a dissenting vote is significant, considering that this person works in nearly the same space as Chair Powell. This implies that Chair Powell was unable to persuade this board member. The reason for the dissent this time was that I was personally surprised by the 50 basis point cut; I had expected a 25 basis point reduction. The various indicators pointed towards a 25 basis point cut because the U.S. employment figures were not as bad as anticipated. There was an increase of about 140,000 jobs, which wasn't too bad. Additionally, while U.S. inflation seems to be converging towards 2%, it still shows rates around 2.6 to 2.7, which raises questions about whether we can truly feel secure. Various economic indicators, whether related to consumption or industrial production, also point towards a recession.

It wasn't so urgent, so I thought it would have been appropriate to focus on a 25 basis point cut. However, they completely overturned that. In the case of the insurance director, who is someone associated with inflation, the idea of cutting by 50 basis points doesn’t make sense. I think they threw that idea out there. Within the Federal Reserve, it seems like there is almost a civil war happening, with internal conflicts continuing to arise. Rather than exaggerating that, it seems that these divisions are becoming more pronounced, which might lead to a strengthening of the fractures when implementing monetary policy in the future. This is somewhat of a conspiracy theory on my part, but I believe Michelle Bogan is a doctor appointed by Trump. So, it makes me wonder if there was some manipulation involved. In any case, there are some concerns regarding the cuts before the presidential election.

I wonder if we should call it a provocative statement or something like that. I think there were opinions expressed about it. If we interpret everything politically, then, of course, it could all be seen that way. However, I also believe that there is a possibility of that happening. I think there are political risks involved. In fact, the chair of the Federal Reserve was appointed by Trump. While there is room for interpretation, when looking at the actions of Governor Bowman up until now, it makes sense because he has worked closely with Kashkari and has played a significant role within the same party. So, seeing Governor Bowman opposing this time, past Federal Reserve members were also surprised. In the past, one of the people who voted against was Esther.

There was a person named George. He was the president of the Kansas City Fed, and he had opposed several times. However, as the regional president, he expressed his opposition, and he was quite surprised to see that even his fellow board members were against it. He mentioned that it was shocking to him. There are scenes where these conversations take place. So, regardless of how small we might look at this, within the Federal Reserve, opinions on this rate cut were quite divided, and you can see that. In fact, Michelle is concerned about inflation. I understand that the PCE inflation data will be released on Friday based on the recording date. Earlier, the director briefly touched on inflation, but it is currently showing around 2.6%, slightly above 2.5%, indicating that inflation is in the mid-2% range. Particularly, housing prices continue to show a sticky trend.

So, if we see prices fluctuating a bit again this Friday, it could have an impact on the future path of interest rates. This is really important to mention. After Chairman Powell announced the interest rate cut of 50 basis points, there was a flood of questions during the press conference. They asked, Why did you lower it so much? What is the reason for the 50 basis point cut? He explained several reasons, but then they asked, What about inflation? Housing prices are rising; what do you think about that? The consumer price index is closely linked to housing prices. However, for the past two years, Powell has been saying that this will come down, but it hasn't. So, what should we make of this?

I wanted to explain something that has been on my mind. What Chairman Powell is talking about is essentially this: Housing prices are currently quite unique. This is because people who took out mortgages in the past are holding back from listing their homes due to high interest rates; they aren't moving, right? So, the thought is that if interest rates go down, they will start to list their homes. However, when I asked if that meant that housing prices would actually fall if interest rates decrease, Chairman Powell connected that idea to another point. He likely wanted to clarify that if interest rates decrease, the demand for housing could actually increase. Therefore, even if the supply increases, if the demand for housing also rises, housing prices could go up again. So, with lower interest rates, people might feel motivated to move.

Jesus, so what this means is that when interest rates go down, it actually leads to more houses being sold, which reduces the burden of housing costs. I think that’s what Powell was believing when he decided to lower the rates by 50 basis points. But then suddenly, he also stated that many people are still able to buy houses, which surprised everyone listening. However, what I believe is the key point from the Federal Reserve's perspective is that this is not a problem the Fed can solve. Rather, it's something that needs to be addressed by the government, particularly the executive branch, through policies related to housing supply. So, if we take this all in, the conclusion is essentially that we don't know. And then, he goes on to discuss how housing price inflation can sometimes be short-term.

It's not ending; it could continue for another year or two. This means that the Federal Reserve cannot cover this. In some sense, even if the time to converge to 2.0% is delayed while housing prices maintain a high level of inflation, that is not something we can control. This can be interpreted as a warning. When looking at this, one might think that the central bank is the guardian against inflation. Inflation is the only thing that should be closely monitored, yet it gives the impression that they are somewhat lax about it, as if everything is over. The key point made by the board member is that if we declare victory too hastily, we won't find the solution. Because even if the fire seems to have gone out, if there are still embers left, it can lead to a massive fire.

Isn't it possible? So, if you look at it now, inflation-related indicators are showing the possibility of rising again, little by little. It seems that the director of the insurance agency is also focusing on this part and is worried. From that perspective, I believe that while we are currently paying attention to employment indicators and growth-related indicators, we should not neglect the price-related indicators. I think they are indicators that we need to continuously monitor. For reference, the expected inflation in the United States is rising again. After this 50 basis points increase, the situation in the U.S. financial markets is becoming very accommodative, returning to levels before the interest rate cuts. Ultimately, these factors could further increase inflationary pressure. Regarding the political issues you mentioned, I don't believe there is a basis for that, but if it were true, then the attempt to lower interest rates due to political pressure would be...

If so, when is this similar to in the past? It's very similar to the 1970s. Ah, there were similar events back then as well. Yes, that's right. At that time, the chairman of the Federal Reserve was Arthur Burns, and the president was Nixon. They were quite in sync with each other. To support the re-election of this person, they lowered interest rates, and there were such actions taken. Of course, I’m not saying that the current situation is exactly the same as back then, but if political issues are brought into monetary policy, it is possible to lower interest rates. This could help maintain growth, but there is a risk that it could prolong the battle against inflation, which is nearly over. Such problems could resurface. So, that’s what Board Member Bowe was accurately pointing out. If indicators showing rising prices continue to emerge, then...

In fact, looking at what was announced at the FOMC last month, the long-term interest rate forecast, which can be considered as a sort of neutral interest rate, is projected to be around 2.9% by the end of next year. If inflation does not stabilize, that figure could rise a bit more. You can think of it this way: the increase to 2.9% was influenced by the process of persuading the Federal Reserve Board members, particularly the hawkish faction. What I mean is this: the dovish side would have applauded for a 50 basis point cut, but how would we persuade the hawks? If we said 50 basis points, they would think we were crazy. So, the argument is that if we lower it by 50 basis points now, it will help ease the slowdown in the economy, allowing us to gradually lower rates later. Thus, we can act now and proceed slowly afterward.

I'm going, but if we go too slowly right now and mistakenly cause a recession, we might have to aggressively lower interest rates. So, by setting it at 50 this time, we can afford to move slowly later. I think that’s how I persuaded them. If we lower it to 50, the potential growth of the U.S. economy won't be damaged, so in the medium to long term, we can maintain a better outlook compared to before. We can say that we adopted a method of lowering rates upfront while boosting them later. I interpret that we were able to see signs of a rising neutral interest rate during the process of persuading the Fed. Yes, that’s right. I understand. Looking at what the Fed has announced, it seems they will pay more attention to employment than inflation going forward.

Now, that aspect seemed strong. So, I'm curious about the current employment situation in the United States. It's not bad right now. The employment situation is not bad; of course, the Fed didn't explicitly say that. They mentioned that the balance has been achieved. So, as you mentioned, they are likely to place more emphasis on employment compared to inflation. Currently, the U.S. job market is not bad. In fact, looking at the employment figures from August released in September, there was an increase of 140,000 jobs. While that's not great, it can be considered decent. However, what the market is concerned about is, first of all, the fact that they mentioned it could be 100,000 or less when looking at the details.

It could be revised. There is a breaking news rate of 140,000, but, oh, I’m sorry, I called it out too loudly, so there is a possibility that it could decrease. I think these thoughts are somewhat in the air. However, more than that number itself, Chairman Powell must have thought about this during the FOMC meeting. Reporters might have asked why the numbers were lowered and whether it was politically motivated. The first thing he mentions is looking at the U.S. job market. In the past, if about 100,000 jobs were created each month, that was considered not bad; it was okay. But now, there has been a significant increase in immigrants. The Biden administration has actually accepted more immigrants, increasing the supply of labor to fill the overflowing job positions. However, the problem is that there is now a lot of labor available. So, then...

To prevent the unemployment rate from rising, job creation must keep pace with the increase in the workforce. In the past, for every 100 people, we created jobs for a certain number each month, but now that number has increased to 1,000. If we continue to create jobs for just 10 people each month, similar to the past, the unemployment rate will inevitably rise. Chairman Powell also mentioned that when considering immigration, it is not just about creating 100,000 jobs; we need to create even more jobs to maintain the current unemployment rate. That was the first point he made. The second point he raised was about the existence of unfilled jobs. In the past, there was a balance between the number of job seekers and job openings, but currently, there are 12 million unfilled jobs and 6 million job seekers. This means that for every job seeker, there are two job openings available.

So, this means that people can choose where to go. They would likely choose to go to places that offer higher wages. This could lead to increased inflationary pressure as wage growth occurs. Therefore, they tried to reduce jobs through strong tightening measures to limit the number of open positions. As a result, the number of available jobs has decreased significantly, finally converging to 6 million. Now, it has reached a 1:1 situation, meaning there are no options to choose from. 

At this point, it seems that wage increases are not happening, which is fine. However, the problem arises when they maintain a tight policy and continue to reduce jobs. Until now, there were plenty of jobs available, so even if jobs were cut, the unemployment rate did not rise because people could go anywhere. But now, in this 1:1 mapping situation, job reductions will start to have an impact.

Then, it's different from what we've discussed so far. The unemployment rate could rise quite rapidly, which is naturally a cause for concern. If we look at the two scenarios, it's not like we're facing a recession with jobs drastically decreasing and the unemployment rate rising. Instead, the situation is relatively stable, but the unemployment rate could increase due to a rise in immigration. Additionally, as I mentioned earlier, the decrease in the number of jobs that were previously abundant could also lead to a rise in the unemployment rate. These are somewhat different discussions. However, people tend to emphasize this rhetoric; when the unemployment rate goes up, the law of social dynamics comes into play. There are many discussions about the fear associated with rising unemployment. It doesn't matter what the reasons are; people might think, Isn't a recession coming? and consequently reduce their spending.

You know, this could lead to an anticipated economic recession. I want to be cautious about what Chair Powell might think. He has managed to control inflation just barely while maintaining growth, and I believe he would really dislike seeing everything collapse for no reason. Consequently, even though the job market isn't bad, they responded with a 50 basis point increase this time. Now, I understand that the U.S. is forecasting an unemployment rate of about 4.4% for both this year and next. What I thought was, isn't that a bit too optimistic, considering the natural unemployment rate is around 4.5%? However, listening to the director, it seems that the unemployment rate actually needs to go lower for the economy to remain in a good state.

You might think like this, right? In the past, if we created 150,000 jobs instead of 100,000, the unemployment rate would decrease and the economy could heat up. But now, we need to create 150,000 jobs just to maintain the current unemployment rate. In the past, creating 150,000 jobs would have worked to lower the unemployment rate, but now it only serves to keep it stable. So, things have changed from the past. If you look at the number 4.4, it's a very neutral figure, so don't worry too much about the natural unemployment rate; just consider it like this. The 4.4% unemployment rate is significantly higher than the previous forecast of 4.0%, which has been adjusted upwards. This means that the outlook for the unemployment rate has increased. On the plus side, there are also many expectations regarding the benchmark interest rate.

The interest rate has come down, but despite that, the outlook for the economy has been raised. This means that the Federal Reserve is definitely thinking differently now; the game has changed. If employment continues like it used to, it is different from before. This is because a large number of immigrants have come in, and as I mentioned earlier, the ratio of job seekers to job openings has become 1 to 1. Therefore, the decrease in unemployment from now on will be different from before. If jobs start to decrease now, the unemployment rate will map directly to that 1 to 1 ratio. So, I think the previous perspective on the employment market was not accurate. The game the Federal Reserve has to play in the labor market is now more difficult than before; the level of difficulty has increased. In the past, a change of 100,000 jobs would have had an effect, but now it needs to be raised.

In the past, it might have seemed like economic recovery was possible, but now I understand that it may not necessarily be the case. However, from the perspective of individual investors, indicators such as unemployment rates and other employment data tend to be lagging indicators. So, when judging an economic recession, I wonder if looking at employment data might be too late. I'm curious about which indicators we should focus on when assessing a recession. 

I believe that looking at consumer sentiment indicators could be one way to approach this. However, most indicators are generally quite lagging because they are based on survey data collected afterward. Consequently, they have strong lagging characteristics. There are leading indicators that can predict the future, such as the leading economic index or consumer sentiment index. These psychological factors ultimately influence actual consumption in the future.

It has an impact, so one way to refer to these leading indicators is number one. However, the distortion effect that these leading indicators can have is quite significant. Among the actual leading indicators, one of the fastest is the price created by the market. This is because the market forecasts in advance and incorporates this into the price. For example, in the stock market, bond market, and foreign exchange market. What I can say is that the most sensitive to the slowdown in U.S. growth and the U.S. interest rate cuts is, in my opinion, the dollar. Therefore, while we should look at economic indicators, it might be necessary to pay more attention to actual price indicators in the market, such as the dollar index or U.S. Treasury yields, as they can provide more sensitivity. It might be better to return to the basics a bit.

Yes, that's right. But now, this is basic economic indicators, and then market indicators are also fundamental. The thing is, market indicators have developed a lot compared to the past, especially with YouTube becoming popular, so the reflection of prices has become very fast. Therefore, even if we are not accurate, we want to see first how the market thinks. It's much quicker to know that through market indicators. As you mentioned, if we respond by looking at employment indicators, it could already be too late. I understand. However, this time, the U.S. did lower interest rates, but at the same time, they are also engaging in quantitative tightening. This means they are reducing the assets of the Federal Reserve. They are continuously selling or not extending the government bonds that the Federal Reserve holds. In fact, looking at these actions, I find it somewhat difficult to comprehend. This is because lowering interest rates...

Increasing liquidity is one aspect, while tightening on both sides reduces liquidity. There may be some curiosity about why this is happening; it’s not like turning on an air conditioner and covering up with a blanket. Could you briefly explain this? Generally, when interest rate cuts begin in the market, quantitative tightening should stop because it sends a contradictory signal. If you lower interest rates while simultaneously tightening monetary policy, it creates confusion. Therefore, the market had a subtle expectation that with this interest rate cut, quantitative tightening would likely come to a halt by the end of the year. Regarding the discussion about the pancake (which likely refers to the metaphor of a flat economy), it is said that the current tightening on both sides is not really tightening. So, what is it? It seems like there was an excessive amount of liquidity before, and now we are just bringing things back to normal.

In fact, when the central bank directly purchases bonds in the market and injects money, it is considered a non-traditional method. In the U.S., the term non-traditional may carry a different connotation; traditional refers to something normal and familiar, while non-traditional suggests a departure from the norm. This type of policy is known as quantitative easing. As a result, they have ended up purchasing an unexpectedly large amount of government bonds. They believe that now is the time to reduce this, as it cannot continue to accumulate. The Federal Reserve shares this view, so they are gradually reducing it to return to normalcy. This is what was mentioned. Therefore, Chairman Powell indicated that for the time being, a reduction in interest rates and the ongoing process of quantitative tightening may appear somewhat uncomfortable or awkward.

They are talking about the situation. However, the key point from the Federal Reserve's perspective is that they want to provide cash to banks that have been anxious through quantitative easing. If the banks are given enough cash, that would solve the problem. The issue is that there is too much cash. When there is an excess of cash, and the economy starts to improve, banks, feeling more secure with all that cash, may start to lend it out extensively. This can lead to overheating in the economy and create inflation. Therefore, when they begin to reduce the excess cash that has been accumulated, it is referred to as quantitative tightening. If there is too much excess, people, especially banks, become overly confident. Consequently, the tightening process involves banks holding onto reserves at the Federal Reserve.

Reducing the reserve requirements does have the effect of decreasing market liquidity, but in the long run, it is beneficial for banks to hold a significant amount of cash to lower the risk of liquidity crises. That's why the Federal Reserve states that they cannot stop this process. It is a fact that banks need to maintain reserves, but if they hold too much, it can lead to complications. For instance, if someone says, I'm really struggling; can you lend me 50 million won? and instead, they are given 5 billion won, that's excessive. If they then decide to withdraw a large amount all at once—say 1 billion or 2 billion won—it could cause panic in the market.

We are gradually reducing it. Until when will we reduce it? Until the excessive elements disappear, until we return to a normal level. It's difficult to call this a tightening, according to the opinion of the chairperson. Moreover, since we have started to lower interest rates, we need to maintain some safety measures. There is a fear that this could lead to an overheating economy. So, I think we will proceed with some checks and balances. After hearing from the director today, I understand it even better. Anyway, the U.S. has started to lower interest rates, breaking the ice. However, with the U.S. presidential election still ahead, it seems that the long-term interest rates in the U.S. are not reacting significantly. But in the long run, they are likely to decrease, aren't they?

If it goes down, from the perspective of the U.S. government, it might create a somewhat favorable environment for government spending. Both Harris and Trump seem to imply that, given the current feeling, there will likely be significant government spending. I've thought about whether such an environment could be fostered. 

Of course, such an environment can indeed be created. However, ultimately, to reduce fiscal spending, interest rates need to be raised. It seems contradictory, right? Because when interest rates go up, the burden of interest increases, which would typically lead to an increase in fiscal spending. But wait, if interest rates go down, there is less burden, so spending can increase. Therefore, when interest rates decrease, it certainly alleviates the burden of the debt incurred so far, but with lower interest rates, the burden on the budget decreases even further, impacting the U.S. government debt.

The acceleration can actually increase; it's a double-edged sword. So, interpreting the recent interest rate cut by the Federal Reserve as an attempt to reduce government debt seems a bit excessive. However, as you mentioned, if interest rates go down, at least in the short term, the burden of government debt will decrease, which is a fact. 

Additionally, despite the recent 50 basis point cut in the benchmark interest rate, the yield on government bonds has actually risen compared to before the cut. How do we interpret this? Ultimately, the 50 basis point cut could stimulate growth in the U.S. economy in the medium to long term. As growth strengthens, the value of the dollar within the U.S. will also increase. The strength of the dollar, along with issues like overheating growth, could be factors that drive interest rates higher. 

Secondly, with the recent 50 basis point cut, inflation...

If it can stimulate, then it reflects medium to long-term expectations that prices will rise, which can ultimately lead to an increase in long-term government bond rates. So, it can rise as it is qualified by this. In fact, the market had already started to decline even before the interest rate cut. The rates, which were quite high at around 4.2 to 4.3, dropped to 3.7 in an instant as it was waiting. However, when the interest rate was cut and it was said that growth could be stimulated and prices might rise, the previously dropped rates began to recover. This can be seen as a process. In this case, even though a rate cut was made, bond rates have actually spiked. This shows that we commonly believe that a rate cut is good for gold or bonds, but observing this recent movement raises questions about whether that traditional belief holds true for bonds.

가격이 오히려 떨어지는 것이 지금 상황에서도 유효할까 하는 생각이 들더라고요. 지금 미국 10년 국채 금리가 3.75 정도 나오거든요. 그런데 미국 기준 금리가 하루짜리 금리와 10년짜리 금리 중 어느 쪽이 높아야 하냐고 하면, 상식적으로 10년이 높아야 합니다. 그런데 지금 1일짜리는 5%고, 10년짜리는 3.75입니다. 5%가 다 높아야 하는데 10년짜리는 3.75로 내려와 있는 거잖아요. 왜 내려왔냐면, 얘가 빠르게 내려올 거라는 걸 미리 예상하고 기다리고 있는 거죠. 그러면 이미 내려왔는데, 주식 투자하시는 분들도 이런 경우가 있잖아요. 아니, 실적이 잘 나왔는데 왜 빠지지? 실적이 잘 나올 거라고 미리 예상해서 다 팔아버린 그런 일도 종종 보지 않습니까? 연준에서 기준 금리를 많이 올릴 줄 알았던 거죠.

If you go down and wait, in reality, the market doesn't drop as much as expected. What happens then is that it can jump up unexpectedly. Even if it drops 50, it can be seen as having already reflected a lot in advance. The market reacts to the news, and even if they announce a 50 basis point cut, it doesn't mean it's over; the market will expect another 50. This is very similar to the tiger that appears in the story. People want to consume everything in the rice cake mold; they don't want to just eat one piece and stop. They will keep expecting more. So, this morning, there were consumer sentiment indicators coming out from the U.S., and they didn't look good. The consumer confidence index was quite poor, which the market reacted to negatively.

You're waiting, right? Since I gave you a big rice cake last time, you expect that I will give you a big rice cake this time and in the future as well. Because you can't shake off that expectation, you continue to show that you are drawn into it, which can lead to an even more deteriorating market situation.

경제 일타 강사가 말아주는 '빅컷' 완벽 분석 [월간 오건영 1부]

드넓은 경제 바다에서 지식의 돛을 달아드립니다.

양영은 기자
-서울대/MIT 슬론 경영대학원
-경제부, 국제부, 정치부, 문화부

장혁진 기자
-고려대 미디어학부
-경제부(금융·유통), 정치부, 사회부, 문화부 
