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The Fed’s first ‘light recession’ scenario… “It is difficult to predict even the first quarter ahead”

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(provided by the Bank of Korea)

In the stress test scenario released this month by the Federal Reserve System (Fed), the central bank of the United States, an uncertain view of future price trends was captured.

Although there is a possibility of disinflation (slowdown in prices) following the economic recession in the first half of this year, on the other hand, it is interpreted from the viewpoint that the possibility that inflationary pressure will increase following a soft landing cannot be ignored.

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As even the United States predicts the future economy at various crossroads, the Korean economy also faces an opaque future in which it is difficult to foresee even the first quarter.

According to the Bank of Korea’s Washington representative on the 17th, one implication was derived from the 2023 large bank stress test scenario released by the Fed on the 9th.

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The Fed usually divides stress tests into ‘basic’ and ‘negative’ assumptions. This year, we decided to assume two scenarios: baseline and severely adverse.

At the same time, the Fed announced that it would introduce an “exploratory market shock” element for the first time this year to conduct a preliminary check.

A model market shock refers to a situation in which the global economic recession is less severe and inflationary pressure is strong due to high inflation expectations, said a BOK representative in Washington.

The word pilot is used because the results derived from that factor will not determine the bank’s capital requirements.

Under a pilot market shock, movements in key financial variables and commodity prices are directed in the opposite direction to those expected in a severe recession. In a relatively strong recession, US Treasury yields, the value of the dollar, and commodity prices fall, but under a pilot market shock, interest rates on government bonds rise and the value of the dollar appreciates, causing commodity prices to rise due to supply chain disruptions and other factors.

“This is the first time that the Fed has added a pilot market shock element in which the movement of economic and financial variables is the opposite in addition to the very negative scenario of the stress test,” said Jaewon BOK. meaning”.

Jaewon Joo added, “The Fed also presented multiple (two) negative scenarios in 2019 and 2020, but at that time it was to distinguish between the intensity of the economic recession and the recovery period (not the direction of prices).”

A soft landing or ‘no landing’ (no landing) is considered a favorable situation compared to a normal recession (hard landing). However, on the other hand, there is room to delay the transition of US monetary policy by raising inflationary pressure. As a result, volatility in the global financial market may increase and adversely affect the recovery of the real economy in the future.

In fact, the perspectives on interpreting the recent US price index are mixed. The mood is quite different from the year-end and New Year holidays, when the market expected an early shift in monetary policy along with a slowdown in inflation within the year.

Some market participants gave more weight to the expectation that the Fed’s high interest rate will be prolonged, saying that the pace of the US inflation slowdown has slowed as the US consumer price inflation rate exceeded expectations at 6.4% last month. On the other hand, the view of rejecting the opinion based on the prospect of a sharp decline in inflation from the second quarter of this year was also tightly opposed.

Lim Dong-min, a researcher at Kyobo Securities, said, “It is unclear whether optimistic expectations for inflation stabilization at the beginning of the year can be carried out throughout the year.” He diagnosed that “the real economy and financial conditions this year have uncertainties that make it difficult to predict beyond the first quarter.”

The uncertain economic path of the United States will also act as uncertainty in Korea.

The revised economic outlook to be announced by the Bank of Korea on the 23rd came from such a foundation.

Previously, the Bank of Korea predicted this year’s economic growth rate to be 1.7% in its economic outlook last November. Major domestic institutions such as the Korea Development Institute (KDI, 1.8%), Hyundai Research Institute (1.8%), and Korea Economic Research Institute (1.5%) also suggested the mid-to-late 1% level.

On the other hand, global investment banks’ latest growth forecasts averaged 1.1%.

Researcher Lim said, “There may be different views on the real economy, inflation, and financial market conditions around the world this year.” It is difficult to expect price stability,” he said.

Citibank predicted on the 14th that the Bank of Korea would lower this year’s growth rate from 1.7% to 1.3-1.6%. The annual inflation rate was expected to remain at the previous forecast of 3.6%.

Source: Donga

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