[Start Economy] U.S. Cuts Interest Rates for 3rd Time in a row...New York Stock Exchange 'Running' Around 3%

■ Host: Anchor Lee Jung-seop, Anchor Cho Ye-jin
■ Starring: Professor Lee Jung-hwan, Hanyang University School of Economics and Finance

* The text below may differ from the actual broadcast content, so please check the broadcast for more accurate information. Please specify [YTN News START] when quoting.

[Anchor]
We give you the latest economic news quickly and kindly. Start Economy, today with Lee Jung-hwan, a professor at Hanyang University's School of Economics and Finance. Please come in. Let's start with the news of the U.S. interest rate cut early this morning. Following September and November, the cut was carried out again this time.

[Lee Jung-hwan]
As the consumer price index in November met market expectations, expectations were perfectly formed that it would cut interest rates this time. The actual estimate was also expected to cut interest rates by more than 98% by 0.25 percentage points. Your expectations have come true, and you can see it. More important than that, however, there is a quarterly dot plot, which is what the Fed members will see next year's economy. There are tables that predict interest rates, consumer price indices, and growth rates, and I was very interested in this. The reason for this is that Powell's recent remarks continued to say that the U.S. economy is good, and that the U.S. economy means that demand is high, and that demand continues to have a nuance that prices are likely to rise. What that means is that there was a discussion from people that interest rates would be higher at the end of next year compared to September, in other words, that the rate cut in 2025 would be reduced. But I think FOMC's decision made those people's discussions come true. In September alone, the final U.S. base rate was predicted to be about 3.4% just because it would cut the U.S. interest rate four times next year, but in this dot plot, it was reduced to No. 2 and predicted 3.9%. The main reason was that the expectation that the price index would not fall due to the good economy was formed, and consumer spending called PCE is not likely to shrink next year's inflation by 0.4 percentage points higher than before. So, with the opinion that prices seem to have a little more upward pressure than downward pressure, a lot of predictions have been formed that the pace of interest rate cuts will decrease. The economic growth rate and unemployment rate were also set at 4.1%, reflecting the positive situation of the economy and lowering the unemployment rate by 0.1 percentage point. The story is that consumption is not shrinking as expected and inflationary pressure is significant, so that was continued by Powell, who said he would reduce the pace of the key rate cut next year and was discussed in the market.

[Anchor]
How will the U.S. Fed's decision to cut interest rates specifically affect the Korean market?

[Lee Jung-hwan]
The rate cut itself was expected, so you can think of it as no big issue. As I said earlier, you can think of the dot plot as an issue. If the U.S. benchmark interest rate falls less, the U.S. strong dollar will inevitably strengthen. The high U.S. benchmark interest rate means that the demand for U.S. dollar assets is high, and the high demand for dollar assets means that the demand for other countries' assets and currencies will decrease, which increases upward pressure on the foreign exchange market. In the case of Korea, the possibility of the exchange rate rising increases. The issue with this is that the Bank of Korea does not control the level and does not control the level of the exchange rate, but it says it will respond to volatility, but if the exchange rate rises suddenly, it will inevitably have a negative impact on the price index. The fact that all payments are made in dollars and in dollars means that you have to pay dollars to buy something abroad, but you have to pay a lot of won to buy the same thing, so there are concerns about inflation. Conversely, it also has a negative impact on Korea's benchmark interest rate policy and wants to lower the benchmark interest rate quickly, which leads to inflationary pressures. If the volatility of the foreign exchange market increases, it does not seem to be good news because these situations can occur where the base rate cannot be lowered quickly. Personally, that's how I evaluate it.

[Anchor]
I think the Bank of Korea's troubles will deepen. To talk more about the U.S., the second Trump administration, which will come up in the future, has expectations for a rate cut as the trend of not lowering the rate quickly has been formed. Wouldn't these parts conflict?

[Lee Jung-hwan]
In fact, the Trump administration's policy is to grow the economy. We're talking about lowering interest rates quickly to induce investment and especially to create a weak dollar trend because it's about lowering the competitiveness of foreign goods and increasing the competitiveness of U.S. goods, so the exchange rate ultimately determines the price when selling goods to other countries, but when you're trying to create a weak dollar trend, you have to cut interest rates. This is because the opposite mechanism mentioned earlier, when interest rates are lowered, demand for the dollar decreases, and the exchange rate for other countries increases, but the stance does not fit. What Trump wanted was a weak dollar stance in the first period of the administration, but now the fact that interest rates are not falling means that they can go to a strong dollar stance, so they say they have no choice but to continue to have friction with the Trump administration. The Trump administration is also likely to talk straight about these interest rate decisions, so in fact, the central bank should be independent, so the U.S. administration does not engage in interest rate decisions that much, but Trump is a person with a little political uncertainty and is likely to talk about it directly, so you can think of these concerns as true.

[Anchor]
How did the New York Stock Exchange flow look after the Fed announcement?

[Lee Jung-hwan]
The market continued to base it on four cuts in September, and even if Powell said so, there were doubts about whether he would actually reduce the rate cut like that. As this is actually realized, there were opinions that the stock price fell due to the 9th consecutive day of the strong rally and the Dow Jones Indices, and as soon as Chairman Powell's remarks began, the stock price fell vertically and continued to fall. Compared to the first time, they continued to lose a lot of weight until the end, almost all of them were around 3%. In the case of Nasdaq, about 3.5% is falling out a lot. The biggest factor in this is the negative opinion of the market that the rate of rate cuts will be slower than expected.

[Anchor]
It looks like a lot of money has been lost from the index. Let's also look at the economic situation in our country. I think the aftermath of the emergency martial law continues right now. Domestic demand is not good, and it's difficult to enjoy the special year-end, right?

[Lee Jung-hwan]
In fact, indicators such as card consumption have recently been announced on a 15-day basis, and it can be understood that negative results have been obtained from indicators that card consumption represents general consumption. What it means is that after 15 days of use compared to November, there are stories that consumption in December has decreased, and seasonally, when do you use it a lot in November and December, compared to last year, November is in the low 3% range compared to last year, but now it is 3%. Therefore, some say that the growth rate of card consumption itself seems to have decreased, leading to a contraction in consumption. Card consumption can be said to be an indicator of our consumption behavior, but looking at things like card consumption, it is confirmed that martial law is having a negative impact.

[Anchor]
Is it because of this? The Bank of Korea lowered its economic growth forecast for this year by 0.1 percentage point.

[Lee Jung-hwan]
The impact of uncertainty, especially now, was updated yesterday, and we slightly lowered our economic growth forecast for the fourth quarter. You can understand that in the fourth quarter, we were originally forecasting 0.5% growth, and then we lowered it to 0.4 and what we lowered in the fourth quarter affected the overall economic growth rate, and we had this effect of lowering the overall economic growth rate by 0.1%. In the end, what we're talking about is shrinking consumption. President Lee Chang-yong keeps talking about uncertainty, but the market is uncertain even though it has decreased from 2.2 to 2.1. And domestic demand was bad in the third quarter, but it doesn't seem to be rebounding like that in the fourth quarter. I think the lower-than-expected economic growth rate in the third quarter was a slump in domestic demand, but exports are solid, but domestic demand continues to not support it, especially when martial law occurs, consumer sentiment shrinks, and these situations are expected to be reflected in GDP indicators.

[Anchor]
Another forecast is about prices, and the stabilization target level will reach 2% by the second half of next year. Should price stability eventually be seen as a contraction in consumption?

[Lee Jung-hwan]
I think there will be an effect of shrinking demand. In fact, the consumer price index for September, October, and November is around 1%. The most recent one is 1.5% and it's lower than our target of 2%. I mentioned earlier that consumption shrinks, but since the consumer price index is an indicator that has no choice but to reflect consumers' demand directly, it is possible to understand that these situations continue to be worse than in the third quarter. Therefore, the Bank of Korea predicts that the combination of interest rate policies will stabilize around 2% next year. I think the Bank of Korea will also cut interest rates, and if interest rates are cut, upward pressure on inflation and the probability of going up will increase, so if this is right, I think they are predicting that they will be able to keep it stable around 2% next year.

[Anchor]
However, there is a prediction that consumer prices will also be in the 0% range, and I think it would be good if prices were low, but this is not a good phenomenon, right?

[Lee Jung-hwan]
In fact, when prices fall, production decreases. Because when people make profits, prices can be regarded as a response to demand, and prices usually think that the 2% standard is appropriate, but if it becomes a little lower than this, companies have no choice but to predict a lot that demand will fall when they predict demand. What it means is that when demand falls, production is reduced, investment is reduced. Reducing investment is also a step that can negatively affect consumption because it can eventually lead to this effect of reducing employment. So it's said that deflation has a huge negative impact on the economy. Low inflation is not a good thing because once deflation occurs, employment decreases, wages decrease, and lower wages clearly have these negative effects of shrinking consumption, which lowers economic growth. The situation of deflation is not good, and going to the 2% range meets corporate expectations and is not burdensome to consumers, so you can think of it as a target of the government.

[Anchor]
We've even looked at the price outlook. It's an era of high prices. In the era of high prices, it is a difficult situation for everyone, but I think the economic team will feel more harsh to the vulnerable. By the way, there must be some statistical data that have been released that have been numerically quantified?

[Lee Jung-hwan]
You can think of it as statistical data on processed foods, and don't you think processed foods have a price range even if they are the same processed foods? There are high and low prices, but the fourth quartile is the same price but high prices. The first quintile has a graph, but you can think of it as something with a low price range. If you look at where prices rose, low-priced products rose by 16.4% and high-priced products rose by only 5.6%, and prices rose more from low-priced products, indicating that consumers, in a way, increased their burden on shopping cart prices, and eventually, inflation among low-income people was a little harsher.

[Anchor]
Then, in terms of the phenomenon, can it be seen as chip inflation?

[Lee Jung-hwan]
You can think of it as chip inflation. Economically, this is obvious. Because the price of goods is called the cost margin and the yield margin, you can see it as a saying that products with low prices should sell a lot instead of reducing the margin a little. In other words, because these margins are small, these situations will inevitably be reflected in the price as soon as the cost rises. On the other hand, products with high product prices can use this strategy to keep prices appropriately while reducing margins even if prices rise because the margins are so high that it is difficult to use such strategies in the first place for products with low prices. So when the cost goes up, products with low prices go up. It is natural for cheap prices to rise, and the demand for low-priced products has increased as the economy has contracted. What that means is that because demand has increased, there has been an environment in which low-priced products can easily increase their prices, and chip inflation has occurred where low-priced products have risen a lot.

[Anchor]
What policies do you think are needed in the era of harsher high prices for the vulnerable?

[Lee Jung-hwan]
In fact, I think we need things like tariff cuts in the short term. Because I think we need to stabilize their prices quickly while actively reducing tariffs on cheap goods or giving subsidies to taxes. In fact, the fact that the impact of inflation is going to the low-income class means that their lives will be very difficult, so they have no choice but to continue to strengthen support for the low-income class. And small business owners are also bound to suffer a lot from these things. Small business owners sell a lot of low-priced products, but they also give them sales, so in all directions, especially the vulnerable, small business owners, and inexpensive items. I think I can tell you that tariffs and support measures for small business owners should come out in combination.

[Anchor]
We talked about class and consumption. This time, let's talk about income. The National Statistical Office released the income movement statistics, and I wonder what the trend is.

[Lee Jung-hwan]
The income mobility statistics are the first statistics of this year. We usually talk about the quintile of income. Quartile is a general statistic that indicates who has the highest income in a specific year, which class has the lowest income, and how much. Movement statistics by quantile can be considered as statistics based on everyone, and statistics from 2017 to 2022 can be understood as statistics by tracking how income has changed from 2017 to 2022. As a new statistic, in a way, it can be understood that it is a statistic that tries to measure the hierarchical ladder by creating an income stage on an individual basis to measure the hierarchical ladder directly.

[Anchor]
In the midst of this, data showing that income polarization can be fixed and the possibility has increased has also been released?

[Lee Jung-hwan]
When analyzing class mobility statistics, they are usually divided into quintiles. Dividing income into quintiles is 20%, 40%, 60%, 80%, 100%, and it's said that people in quintiles, people with very high incomes, don't change well. Even from 2017 to 2022, 70% seems to be fixed. I think it doesn't change much. However, in the case of the 1st quintile, I think it is a group that is a little more fixed, but there is a story that the 1st quintile can fall, but I think we can say that the width of the rise may decrease a little, especially after COVID-19, and that the fixation may intensify. I think it's appropriate to move from the 1st to the 2nd decile. The 5th decile, so actually, the 2nd, 3rd, 4th to 5th deciles should come out quickly, but the 1st and 2nd deciles went back and forth.However, as the fixation intensifies in the quintile, it seems that there are opinions that these opportunities for individuals to grow and individuals to increase their income have been reduced as we raise our income sharply.

[Anchor]
I think the upward movement of the middle quantile should be visible. So far, I have been with Lee Jung-hwan, a professor at Hanyang University's School of Economics and Finance. Thank you for talking today.