“The market has now lost its fear.” (Wall Street Journal, USA)
U.S. Federal Reserve Chairman Jerome Powell and Federal Reserve personnel have maintained a cautious tone ever since the Federal Open Monetary Fund Committee (FOMC) meeting in January. The expectation of an interest rate cut itself can stimulate inflation, and the U.S. economy is on the rise despite intense austerity measures, so there is no reason to rush. Chairman Powell took the same position at the U.S. Congressional hearing on the 6th and 7th, but ultimately gave an answer that he would be able to gain certainty “in the near future.”
The mayor cheered in unison. Even European Central Bank (ECB) President Christine Lagarde added fuel to the fire by mentioning June. There were even predictions that this would be a turning point for central banks around the world to ‘pivot’ from austerity to easing. However, due to the rise in the global asset market, ‘sticky prices’ that do not go down once they rise continue, so there are many counter-arguments that we should not be optimistic about the timing of the cut.
According to FedWatch of the Chicago Mercantile Exchange, policy interest rate futures investors raised the possibility of an interest rate cut in May by 7 to 8 percentage points. The market is generally dominated by June loans. Analysis that political controversy will be avoided by lowering interest rates before the Republican and Democratic National Conventions held in July and August ahead of the US presidential election in November is also gaining momentum on Wall Street.
Son Seong-won, a professor of financial economics at Loyola Marymount University, also said, “If prices go down while the Federal Reserve maintains the base interest rate, the real interest rate will rise as a result,” adding, “It is better to lower the interest rate quickly to avoid burdening the economy.” predicted. Moody’s Chief Economist Mark Zandi predicted, “The first cut will be made in May and will be lowered by 0.25 percentage points each quarter.”
The problem is inflation. The U.S. consumer price index (CPI) increase rate in January was 3.1% compared to the same month last year, exceeding market expectations (2.9%). Chairman Powell and Governor Lagarde have maintained the position that “we will make decisions based on real-time data,” so if prices continue to remain sticky, an interest rate cut in the first half of the year may go a long way.
There are many voices within the Federal Reserve concerned about a resurgence in inflation. Minneapolis Federal Reserve Bank President Neel Kashkari recently said, “You may think you have both feet on the brakes, but you may only have one foot on the brakes.” This means that the current interest rate is not sufficiently restrictive, so high interest rates can be maintained.
The market has taken the interest rate cut as a fait accompli and is conducting an unstoppable rally. The S&P 500, which broke the 5,000 mark for the first time last month, broke its 16th high this year, and Bitcoin also recently broke through $69,000 (about 90.94 million won). Michael Hartnett, chief investment strategist at Bank of America (BofA), said, “The ‘animal spirit’ of the financial markets is coming back to life.”
The value of the dollar is falling due to the possibility of an interest rate cut. The dollar index, which shows the value of the dollar against the currencies of six countries, rose to 104.96 last month but fell to 102 as of the 8th. Due to the weakening dollar, gold futures are also hitting record highs every day.
This trend is largely due to the artificial intelligence (AI) craze that stimulated investment sentiment. Nvidia, a leading AI company, rose 4.47% on the day and closed at $926, hitting an all-time high. In Europe, pharmaceutical companies such as Denmark’s Nomo and Nordisk are leading the upward trend, and in Taiwan, semiconductor stocks such as TSMC are strong.
Korea was also affected. According to the Korea Exchange, on this day, KOSPI closed at 2,680.35, up 1.24% (32.73 points) from the previous trading day. At one point during the day, it rose 1.53% to 2688.00. In the Seoul foreign exchange market, the won-dollar exchange rate closed at 1,319.8 won, down 11.1 won.
However, experts predicted that the impact on the Bank of Korea’s decision to cut interest rates would be limited. Ha Jun-kyung, a professor of economics at Hanyang University, said, “The Bank of Korea can only carry out a cut when prices stabilize as inflation remains the same.” Choi Je-min, a senior researcher at Korea Investment & Securities, also said, “The Bank of Korea is likely to maintain the same policy in the first half (January to June) and then start lowering interest rates in the second half (July to December).”
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Source: Donga
Mark Jones is a world traveler and journalist for News Rebeat. With a curious mind and a love of adventure, Mark brings a unique perspective to the latest global events and provides in-depth and thought-provoking coverage of the world at large.