Hello, viewers. Let's start with Gookmo Inseconomy Eunpung. With the U.S. employment indicators coming out better than expected, the market's expectations for July interest rates have somewhat diminished. Consequently, various impacts are expected based on the results of the FOMC meeting on the 12th and the CPI results for May in the U.S. We will discuss this with Dr. Choi Jin-ho, an economist from Woori Bank. Welcome, how are you? It's really hard to predict U.S. interest rates. I really don't know how this will turn out. Looking at the U.S. employment indicators released last Friday, the economic situation in the U.S. still seems good. The forecast was around 80,000, but the non-farm new job numbers increased by 272,000 compared to last month. A comprehensive diagnosis of the U.S. economic situation based on employment indicators is necessary. When we look at the overall trend, the employment indicators are doing well.

Being high is also a way to refute that the U.S. economy is doing well, so now many are surprised in the market. When asked if the recent interest rate cut is necessary, they were surprised. If you look at the bigger picture, the job market is structurally returning to an efficient state before the coronavirus. Therefore, I would like to say that it can be evaluated positively. I have prepared a chart of the U.S. Beveridge Curve. When you look at the data, the blue dots represent the relationship between the job vacancy rate on the vertical axis and the unemployment rate on the horizontal axis. When both the job vacancy rate and the unemployment rate are low, it means we are in a situation before the coronavirus. If you look at the blue dots, they are very close to the origin. This means that the demand and supply of labor are quite well balanced.

Efficient allocation and falling mean that the market is efficient, meaning that the cost of wages in the market is not maintained at a high level, representing the people. However, if you look at the distribution of green dots after Corona, they have moved further away from the origin overall. For example, what are the phenomena that appeared after Corona? The wage increase rate was very high in the United States, so the market became inefficient due to moving away from the origin. However, from March 2022 to May 2024, if you look at the data, the unemployment rate has not changed significantly, but the hiring rate has decreased rapidly. In other words, the demand for labor has decreased significantly. Therefore, recent data shows that the distribution of blue dots has shifted towards the original distribution.

You moved, so there is now a process of re-efficiency in the labor market in the United States, and if you see those things, this month's employment report will certainly have factors that prevent a decrease in the U.S. benchmark interest rate. However, in the long run, there are factors that can help lower the inflation caused by this labor market. Structurally, it can be evaluated somewhat positively. I would like to summarize it like this. Oh, there is another aspect as well. However, the problem now is how much the psychology expecting a pivot in U.S. interest rate changes will be affected. It seems like there will be a change in psychology. Financial institutions that predicted the Fed would raise interest rates in July are now pushing back this prediction to September. This is similar to what we have been seeing so far.

The situation is being staged, and it's crucial to see how long these situations will continue. Until early this year, wasn't it until March that Lunar New Year was just around the corner? March passed, then June, and now we have July ahead. Looking forward, September and November are still to come. Actually, based on the data coming out, as you saw even at the Beverly Hills Cup, yes, that process of becoming more efficient from top to bottom took about two years in physical time. So, structurally, it has changed very positively. However, in the future, the U.S. labor market, which needs to go to work, will have to continuously show indicators for the next month or two, which seems more challenging. In that sense, I think it might be a bit tough in July, and looking ahead to September, there is a possibility, but personally, I think around November would be even

It's not likely that there will be a rate hike by the end of the year, right? That's how I see it. Yes, it seems that the situation is leaning towards moving the rate hike from September to even later, possibly November. However, when it comes to the CME FedWatch tool, now what's possible in the future regarding interest rates, they are conducting research and making such announcements. The Fed is expected to maintain the benchmark interest rate at 5.5% this week, outside of the June FOMC meeting, with a 99.4% likelihood, almost certain. That's the current view. So, the Fed has kept the interest rates unchanged for almost a year since July of last year. Dr. Park of the FOMC, do you also see this interest rate freeze as likely to continue? Yes, we believe that the interest rate freeze is almost certain to continue. However, we need to watch how the Fed's stance may change. As you know, this month's dot plot will be released, so the possibility of an upward adjustment in the dot plot is also quite likely.

Isn't it clear that the distribution of the March dot plot itself was heavily skewed upwards, and the rate hike was maintained precariously? Clearly, now it seems like there will be a process of repaying that now. However, what the market is concerned about is always that the market is very cautious about leading ahead of the central bank's stance. Therefore, clearly, this time, in order to prevent market confusion, the dot plot is likely to be revised upwards. If that happens, to prevent market confusion, Powell's press conference stance, at least the wording that soothes the market, will probably come out a little more smoothly. Even if you are worried, the market is unlikely to go back to raising rates. That's the expectation. Strongly hawkish remarks.

I will intentionally avoid it. As you mentioned, the market's attention is now on the FOMC meeting. Now, how the dot plot will turn out is crucial. To explain the dot plot simply, it represents the expectations of the 12 Fed members on the direction of interest rates. They mark their expectations on the dot plot. In March, the median federal funds rate was at 4.75%. To put it differently, if we reverse this, the benchmark rate will be lowered by at least 1.25% within this year. So, they are expected to cut the rate by 0.75%, 0.50%, or even 0.25% - around three times. This was the discussion. However, there is a possibility that the dot plot may change. That's how it is viewed. Yes, that's right. If you look at the dot plot from the FOMC meeting last month, if just one member had voted differently, it would have definitely changed the outcome. Yes, with just one vote difference, it could have gone the other way.

It was maintained, right? Yes, but now, after the March FMC, when you look at April and May, there aren't many significant broken indicators. Therefore, it is expected that there will be some actions to repay the view on the third reduction. Whether this will happen once or twice within this year, or if it will go more aggressively, just freezing within this year, is the issue. In fact, looking at the current market interest rates, if it decreases by one or two steps, the market seems to have already anticipated and reflected up to that point. Whether the country or in the worst case scenario, if they just decide to freeze within this year, some market shock seems inevitable. The domestic situation and domestic interest rate cuts are not entirely synchronized, but there is some correlation between them.

You know, there were expectations that a big wave would hit the domestic bond market this year. Some believed that as interest rates continue to rise, bond prices would also increase steadily. However, as we move past the midpoint, this optimism is gradually fading. In reality, that's the situation. But now, right before the release of the FOMC results, the focus is on the trend of US inflation, which is crucial. The May CPI index is set to be announced, with headline consumer prices expected to rise by 3.4% compared to the previous year, slightly up from the previous month's 3.3%. It is anticipated to be almost the same, and core inflation is also expected to remain nearly unchanged. How should we interpret inflation? Although the market doesn't foresee a significant deviation, the concern lies in the recent rise in rental prices, which is a key indicator of the US rental market.

When you look at things like Jolow Rent Jis, you can still see a very strong lower rigidity of 3.6 to 3.7 compared to the same period last year. Moreover, if you look up to three decimal places after the decimal point, you can see that it is gradually rising. Now, even that aspect is improving a bit. Due to the share of housing expenses exceeding 30% in the U.S. CPI basket, if only the consent is given, I think I will be fortunate. However, if not, if based on the previous month or the previous year, if it increases by 0.3% like last month, then if it rises by 3.6 as seen in the previous year, it is possible to consider. I am also thinking about this possibility. However, even if it turns out that way, when considering the physical time lag, the CPI in May will directly affect the results of the FMC in May and June.

I don't see it that way, but now that the market has accepted it, the FOMC results and the CPI numbers, when combined, do create quite a psychological burden. A strong inflation rate also indicates that the U.S. economy is running actively. Therefore, it leads to the conclusion that the U.S. economy is robust. Now, if the Fed's interest rate hike is delayed, various issues will arise in the future. What are the most notable phenomena? Typically, if the period of tightening prolongs, economic entities that cannot bear the high interest rates will start to go bankrupt. When businesses go bankrupt, households will also go bankrupt.

In cases where it spreads as a systemic risk, it's not as big as it seems. Most of the historical financial crises we've seen always came as banks went bankrupt, causing it to become a systemic risk. Therefore, there were concerns that a similar phenomenon might occur last year when Silicon Bank, Silicon Valley Bank, emerged. However, over the past year, as you may have seen more news than I have, there haven't been significant issues like that. Therefore, it is true that the timing of interest rate cuts is being delayed due to negative factors in short-term market sentiment. However, as mentioned earlier, behind this, there are factors that can support prices, such as the current price level and the acceptable growth.

As Mayor Ahn is now providing enough support, it is also a refutation because he believes that the shock is now gradual and in the long term, the impact will not be significant. In particular, if we look at stocks and bonds separately, in the case of bonds, if it is reported aggressively that they may freeze within this year, the interest rates are likely to rise slightly compared to now. In that case, the bond market will inevitably face a shock, and the stock market will also have to face the impact. However, in any case, the current stock market, although somewhat biased towards the outlook of some sectors and companies with good prospects, is said to be driven by a few of those stocks. If this trend continues, stocks may suddenly undergo adjustments or experience a significant downturn, unlike before.

I believe that it's not a picture where the market is in a panic state due to bonds falling together. Therefore, I expect that the bond market will experience short-term shocks, and the stock market will also recover after a short-term shock. Looking at recent trends, it seems like the market is moving predictably, as in the old saying. I think people are predicting that if it rises, it will not fall sharply, to some extent. So, I don't expect sudden pivots one day, causing interest rates to plummet. The issue now is that the exchange rate is putting a lot of pressure on countries, including ours and Japan. The USD/KRW exchange rate surged from 16 won to 18,380 won in intraday trading yesterday. And looking at last night, the NDF was at 1373.

I'm in a very high-altitude march, but if the U.S. interest rate continues to stay low like this, the exchange rate between the Korean won and the U.S. dollar won't drop, right? That's correct. Currently, the dollar has increased by a little over 3% this year, but the won-dollar exchange rate has risen by over 6%, much higher than that. This indicates that there is a sentiment of a strong dollar, especially in Korea, which, although an advanced economy in terms of economic size, still has a relatively weak sentiment due to the significant presence of the Korean won as an emerging currency. Looking ahead, haven't we already seen a rate hike in 2020? Yes, and as advanced economies each begin to move towards their own currency policies, within such a framework, the U.S., with its exceptionalism in the economy, believes it is fine on its own.

If vigilance is strengthened, such actions may actually push up the strong dollar phenomenon a bit, intensifying the seizure and acting on it. It's not like the exchange rate will go to 1400 or 1500 won, but currently, it seems that the level is staying around 1,300 won in the late or mid-late range for a long time, and there is a possibility that it may appear in that picture. Then, Korean companies will also have a hard time, and various things will become much more difficult. Yes, as you just mentioned, I didn't quite understand why the Bank of Canada and the European Central Bank suddenly lowered interest rates. Can you please explain this a bit? How should we interpret this? Now, the monetary policies of major countries around the world are just each country's way of survival. I can't find the connection now, but keep an eye on the U.S. synchronization.

Let's just go separately now. In 2022, starting from March, when the Fed raises interest rates, at that time, it was a situation where global inflation was rising together, not just the United States. Therefore, even if we couldn't follow the United States as much, the atmosphere was to follow the direction of the United States altogether. But now, globally, interest rates are coming down, or slightly stagnating, or in any case, the direction itself is peaking out, so in this situation, countries with lower growth rates, countries with lower expected growth rates, have no choice but to raise interest rates to boost the economy. In that sense, maybe in 2020, or in Canada especially, for example, this year, broadly speaking, rolling over every three months on an annual basis, looking at inflation, it is almost at a level that meets the target level.

It is judged that way, so there is no pressure from inflation, which is why Canada could lower interest rates without burden, and in the same case, now that the growth rate forecast for this year is in the early 1%, it seems like they are taking the action of lowering interest rates to escape from this high interest rate situation. I mentioned Japan earlier, but the situation of Japan's benchmark interest rate is a bit different. They are worried about when to raise it even a little due to exchange rates. They need to adjust it. Regarding this, Japan has a considerable amount of debt, and how can we interpret this in connection with the FOMC? So, in the market, most voices now say that the Bank of Japan (BOJ) will raise interest rates, for example, when currency policies are normalized. This is what they say about the BOJ's rate hike. However, personally, we are a bit skeptical about whether the BOJ will actually raise interest rates. Because, as I mentioned about Japan earlier, each country's currency policies are...

Global cooperation is important, but what is more crucial is the situation in each country. Last year, Japan's economic growth rate was 1.9%, but this year it is 0.9%, with an expected rate of 0.9%. It's almost halved. In such a situation, in April, Japan's core consumer price index (CPI) hit 4.2%, meeting the policy target level. So, in this situation, I have some doubts about whether it is necessary to raise interest rates. However, central banks, regardless of the country, always dislike market focus. They also dislike being seen as players in the market. Therefore, from a fundamental perspective, monetary policy...

From a normalization perspective, if we interpret the process of normalizing interest rates that have been too low until now as observing it through a mill, we might have various interpretations. It could be seen as a few steps if interpreted this way, or it could be seen as a pigeon step if interpreted differently. I believe that a vague, neutral stance will continue to be maintained. Japan is also concerned about exchange rates. They must be very concerned about exchange rates. In fact, there seems to be no way to control this other than through monetary policy. So, rather than being a problem of the exchange rate level itself, if Japan continues to have a high exchange rate, it may eventually push up profit prices and raise consumer price inflation back above 1%. It seems like they are worried about this kind of scenario. Therefore, at the BOJ currency policy meeting and financial stability meeting, the phrase that always comes up is that the exchange rate affects prices.

They are talking about closely observing the impact. However, currently, in terms of numbers, it is true that the inflation is rising, but compared to the sharp increase in the exchange rate, the inflation is quite stable. Therefore, I am somewhat conservative about giving a signal that they will proceed with a rate hike in this situation. Lastly, the key point is whether the Bank of Korea's monetary policy direction, which remained at 3.5% this year, will continue. We have been somewhat disconnected from the U.S., but how do you think it will be in the future? Oh, in Korea, as I mentioned, global central banks are each conducting their own monetary policies, and even in their own faces, Korea seems to inevitably lean towards the U.S. direction a bit.

When you look at countries that are more sensitive to interest rates than the United States, countries like Japan, Canada, and various European countries in their 20s are not as sensitive to external shocks. However, in the case of Korea, with a high proportion of exports, they react very sensitively to external shocks. Taking that into consideration, during the press conferences on monetary policy, the governor always mentions that we must consider these conditions to be in place in order to contemplate taking action. It's not just a mechanical requirement that we must fulfill. Even though the conditions are met, only then can we consider taking action. What I really empathized with is that being proactive definitely comes with risks, and Korea is no exception. That's why Korea must carefully consider the Fed's monetary policy before making any decisions.

It's not mechanical, but at least the Fed should take a stance. With that, various global interest rates, the USD exchange rate, and such factors derived from it affect the domestic economy. After analyzing these aspects, we confirm the impact and then adjust the interest rates. Now, thinking in this direction, maybe this year, even until November instead of October, the Bank of Korea might find it challenging to raise interest rates by the end of the year. Personally, due to the USD exchange rate, I feel a bit concerned about how to handle this issue. It seems quite burdensome as it is related. Today, we discussed the U.S. interest rates and their impact with Dr. Choi Jin-ho, an economist at the Korea Economic Institute. Thank you for your insights today.

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