■ Broadcast: YTN Radio FM 94.5 (09:00-10:00)
■ Host: Reporter Cho Tae-hyun
■ Air date: December 19, 2024 (Thursday)
■ Talk: Joo Won, Director of Economic Research at Hyundai Economic Research Institute
* The text below may differ from the actual broadcast content, so please check the broadcast for more accurate information.
◆ Reporter Cho Tae-hyun (hereinafter referred to as Cho Tae-hyun): The U.S. Federal Reserve lowered its key interest rate by 25 basis points as expected. As I said, this is what was expected. As for next year's further cut, he hinted at adjusting the pace, which was expected to some extent, but was much more hawkish than expected. So it also signaled a tense relationship with Trump, who will take office next month. Of course, this will affect not only the United States but also the Bank of Korea. For related information, let's talk over the phone with Joo Won, head of the Economic Research Division at the Hyundai Economic Research Institute. Is the manager here?
◇ Joo Won, Director of Economic Research at Hyundai Economic Research Institute (hereinafter Joo Won): Yes, how are you?
◆ Cho Tae-hyun: Yes, hello. Of course, you must have expected a 25bp cut. But overall, how did you hear Chairman Powell's interview after the dot plot?
◇ [Joo Won] First, the Fed made a big cut in September, down 0.5% from the previous 5.5%, then down in November, and now down again in December, down 1 percentage point for about four months. 4. It's down to 5%. Everyone expected it up to this point. The possibility of a 25 basis point cut this time is, for example, that all U.S. economic indicators are okay, but the unemployment rate is a little high. So, it's not very high in the early 4% range, but I think I've considered that a little bit. Prices are still high at the central bank of any country, and employment prices are still high, but I think I lowered it that way with some future in mind of the job market.
◆ Cho Tae-hyun: But if you look at the price outlook for next year, it's slightly increased. This will keep inflation tight until next year. Should I look at it based on the results?
◇ Note: Not a little, but they're not based on the U.S. Consumer Price Index (CPI), but our country is based on consumer inflation, but the U.S. Fed is based on PCE, not CPI, or personal consumption inflation. At the September meeting, I expected next year's to be 2.1%, but this time, I set it to 2.5%.
◆ Cho Tae-hyun: You posted a lot.
◇ Joo-won: It's a 0.4% increase. I think this is a message to the market that if we interpret this indicator clearly, we should not expect a quick rate cut next year.
◆ Cho Tae-hyun: It's a very strong message to the market that we're going to eventually speed up the rate cut, right?
◇ [Ju-won] Yes, that's right.
◆ Cho Tae-hyun: Okay. Then, he expressed his intention to lower interest rates immediately but adjust the pace next year. In the end, it can be seen that personal consumption expenditure, PCE growth, and prices have had a fundamental impact on the background. If you look at the dot plot, The neutral interest rate has been raised. The dots are spread out a little. Then, shouldn't this mean that the interest rate outlook is somewhat uncertain even within the Fed next year?
◇ [Juwon] It's not very spread out. Rather, about 10 people, or 19 people, draw up a dot plot, but about 10 people set the first half of 4.0% as the end of next year. So in September, the median price was about 3.5 and 3.25, but it was raised a lot.
◆ Cho Tae-hyun: That's right.
◇ JW: We're seeing 4%, about 10 people, so it's 4.5% right now. Then, if you do it once, it's 0.25%, so the Fed is expecting this twice next year.
◆ Cho Tae-hyun: If we cut it twice or twice next year, the timing seems to be around March, July, or September. Then, can we see it as a sign that we will continue to look at economic indicators until the second quarter?
◇ Joo-won: Oh, but I think we need to see how the private sector sees it. The Fed announced it twice next year, but I checked with the Chicago Mercantile Exchange (CME) today's date and thought I saw it wrong. There is an FMC in the Fed in January. There's a 4.75% probability of 94%. That's 4.5% now.
◆ Cho Tae-hyun: It means you're going to upload it.
◇ [JU-WON] It means it's going to go up 0.25%. This will continue to have the highest probability of 4.75% until May, and the highest probability of 4.5 at the end of next year. The market is looking a little scary, and the market is looking at the possibility that the Fed will raise it sometime in the first half of next year. Of course, the Chicago Mercantile Exchange is a private market.
◆ Cho Tae-hyun: It's a little bit ahead of you.
◇ Joo-won: Yes, it's fickle, but the private sector is quite anxious about it, so at least the private sector is thinking that interest rates will be lowered next year. However, the private sector's prediction that the U.S. Fed's dot plot would rise from 3.25% and 3.5% to 4% at the end of next year was correct. In particular, if this Fedwatch (CME) had expected that, then next year's interest rate path may be much more hawkish than we thought. I have a strong feeling of that.
◆ Cho Tae-hyun: I think I'm very scared in the market. Looking at it now, the Fed Watch Tool in January next year shows that the top was 4.75% in January next year, which is 93.6%. I think it's very hawkish in the market. If so, can we say that the possibility of lowering interest rates in January is zero, and this outlook reflects the Trump administration's policies?
◇ Joo-won: We can confirm during the presidential election that this is a power struggle between the U.S. Fed and the Trump administration.
◆ Cho Tae-hyun: He's bickering.
◇ [Ju-won] Yes, but if there's a conflict with each other in earnest, it's after Trump took office. However, during the presidential election, Trump will talk about it later, but he also said there will be no second term for Powell. As a result, within the U.S. Fed, their heads were not recognized by Trump. And if you look at Trump's policies you mentioned, there are many policies that have a lot of dollar liquidity on the market that releases a lot of dollars. Tariffs and then tax cuts, so if it eventually raises prices a little, you might think that if prices go up, the Fed has no justification to lower interest rates, and that the Fed has preemptively expressed a little hawkish view next year.
◆ Cho Tae-hyun: Okay. According to foreign media reports, it seems to reflect a little bit of the Trump administration's tariff policy. There are reports like this, but I think it would be better to watch the situation a little longer to see how they saw it. You mentioned dollar liquidity a little while ago, so let's take a look at the value of the dollar. Last night, I was surprised that the dollar index rose to the 108th level. If this happens, it will inevitably affect the exchange rate of Korea, right?
◇ So the dollar index is based on the dollar, six major currencies, the euro, the Japanese yen, and the British pound, and the dollar value goes up as it goes up. So I have about 107.8 left, and this is the highest since November 2022. And of course, the impact of this is a fairly hawkish statement to control the pace of interest rate cuts, which is why the dollar is strong, and if this happens, the won-dollar exchange rate is likely to go up a little bit for the time being.
◆ Cho Tae-hyun: In the market right now, it's around 1450 won, but there's a possibility that this high exchange rate will continue. Can I look at it like this?
◇ [Joo Won] It's not a matter of possibility, I think it's just a fait accompli.
◆ Cho Tae-hyun: The 1,400 won range has become the new normal. I think it's been a very scary time. I looked at the exchange rate. I think we should also look at the bond rate, but there was also a feeling that the U.S. government bond rate rose almost like a seizure last night. How do you think the bond market will continue to respond in the future?
◇ [Narrator] I call it a kind of tentum because of the hawkish comments in the U.S. financial markets. That also caused a seizure, but just a few days ago, the 10-year U.S. Treasury bond rate was around 4.2%. It's now over 4.5% since the Fed announced it. This is the highest level in six months. Of course, it's based on the Fed's interest rate offering, and the other thing is that Trump's tax cut policy, which cuts taxes, will eventually have to issue government bonds. So, if the amount of government bonds increases, the yield goes up, and the market is not sure, but the Fed is tightening quantitatively. At that zero interest rate, I released the dollar by buying bonds such as government bonds, but this time, I've been selling bonds since a year or two ago. So this is more bond supply. Considering those factors, I don't think government bond rates are likely to stabilize easily in the future.
◆ Cho Tae-hyun: So you're saying that if bonds continue to come out in the market, bond prices will fall, and that's because it has the effect of raising bond rates? I see. Then, there is a possibility that bond rates will continue to rise in the future. And if you look at the New York stock market, there were situations like this where the New York stock market plunged, and the Nasdaq fell by more than 3%. But overall, interest rates are the same. Some analysts say that various aspects, such as the value of the dollar and bonds, have reacted too excessively. What do you think, manager?
◇ Joo-won: Financial markets are not just markets that move rationally, so when there's such a big shock, we call it tentrum or overshoot. There is a lot of volatility that goes back and forth, but I think this range of reactions is a little excessive, but this impact seems to be quite enormous. While lowering interest rates today, I think the market was a little shocked by the fact that I was very hawkish about the prospect of a rate cut next year. Then, the stock market usually talks a lot about Santa in December, but I think it will be a little difficult for the time being for the U.S. stock market to be without Santa Rally this year.
◆ Cho Tae-hyun: The last gateway I expected Santa Rally was FOMC, and I fell down here. I'll turn my attention to our country. Looking at Korea's monetary policy, didn't the Hyundai Research Institute recently cut next year's growth rate? 1. Was it 7%? What path can Korea's monetary policy take in this situation?
◇ Joo-won: We suggested that the economic growth rate was 1.7% at the beginning of December, but all major investment banks have lowered since then. Morgan Stanley, JPMorgan and Nomura Securities, for example, followed by Goldman Sachs' 1.8% Citigroup, which fell to 1.5%. So if this atmosphere is in the 1% range, I think the consensus will be gathered in the early 1% range. This means that the economy will be quite difficult next year, but the monetary policy of the Bank of Korea you mentioned should be lowered in this atmosphere.
◆ Cho Tae-hyun: That's right. If you look at the economy, you have to get down.
◇ Joo-won: However, although the interest rate reversal gap between Korea and the U.S. has narrowed from up to 2% to 1.5 percentage points now, it is not normal. Originally, our interest rate should be high in the U.S., so the BOK's Monetary Policy Committee is on January 16th. I'm a little skeptical if I can get off next year. If the Bank of Korea falls, there is a possibility that our financial market will become quite unstable or exchange rates. However, until then, some economic indicators should be released in Korea, so it is difficult to predict yet, but I think it will not be easy to get down given the surrounding conditions of the current market.
◆ Cho Tae-hyun: There will be a high possibility of freezing. You said that the indicators should come out, but considering the current impeachment situation, I don't think it will get worse if it gets worse, but it won't get better.
◇ Joo-won: Yes, so if you look at the impeachment of President Park Geun Hye in December 2016, investment and exports were not bad because the semiconductor business was good at that time. However, the only item that got worse was the consumption indicator.
◆ Cho Tae-hyun: Domestic demand.
◇ In particular, the consumer sentiment index and then the private consumption growth rate plunged at that time. If so, of course, there is no guarantee that past cases will apply this time, but in this atmosphere, consumption indicators are quite difficult until the end of this year or early next year, and the Bank of Korea should cut interest rates, but it seems to be something to wait and see because the Bank of Korea also has to consider various external conditions.
◆ Cho Tae-hyun: I don't think it's going to be easy. We talked about monetary policy. When we talk about domestic economic policy, we can't help but talk about finance. First of all, the government announced that 75% of next year's budget will be allocated in the first half of the year, but this story should be viewed as a judgment that it will make an extra budget, right?
◇ Joo-won: For now, I don't think I'm thinking about an extra budget. So 75% was 75% last year. So I think I did a good job because it was about that much. First of all, the budget for the reduction was passed by the National Assembly, but the government is also very concerned about the economy in the first half of next year, and the extra budget you mentioned is not just the will of the government. Since the National Assembly needs an agreement between the ruling and opposition parties, I think there will be additional discussions around next summer if the money is insufficient.
◆ Cho Tae-hyun: I think we can predict that the discussion will take place in the second half of next year. However, the problem is that we are talking about monetary policy and fiscal policy, but Korea's growth engine itself is not the same as before. Compared to 2016, it has turned off a lot. Under these circumstances, do you think you can overcome this with a double-edged sword of monetary policy and fiscal policy?
◇ Joo-won: First of all, there's a standard for calling and finance. In particular, the Bank of Korea continued to mention real estate and household debt and refrained from cutting interest rates quickly, and fiscal policy seemed to be wary of expansionary finances due to fiscal soundness. However, due to high political uncertainty in Korea and poor domestic demand, there is ample room for easing. However, in that case, fiscal and monetary policy must work together to increase economic growth and revive the economy. So one side is still, but you can't just do it on the other side. For example, if you've released your finances, monetary policy also needs to cut interest rates and keep pace with them to create synergy. However, I'm concerned about real estate or household debt, but I think I'll have to choose between the two. It's a matter of choice, you can't catch both rabbits. If so, I think fiscal and monetary policies should shift to a more economical direction.
◆ Cho Tae-hyun: So do you think the current situation is more urgent than household debt or financial stability?
◇ That's right. Interest is important for us to pay off household debt, but more importantly, we need income. The income is much greater. In terms of the amount, if you want to have that income, that is, if you want to keep households healthy, you need to live in the domestic economy. With that in mind, lowering interest rates and releasing finances will be a negative factor in household debt and the real estate market right now, but I think it is more important to revive domestic demand first.
◆ Cho Tae-hyun: Okay. I think it's a very difficult end of the year to tell you good news. First of all, I hope the political uncertainty will be resolved. Today, we looked at the domestic economy related to FOMC. I was with Joo Won, head of the Economic Research Division at the Hyundai Economic Research Institute. Thank you for talking today.
◇ Joo-won: Thank you.
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