Reading Han Sang-chun’s International Economy US Treasury Rates Soaring… Should we promote Fed tapering?

On the 20th of last month, from the first day of inauguration, financial markets have also begun to react to the economic policy of President Joe Biden of the United States, who is focusing on erasing former President Donald Trump enough to issue 15 executive orders. The first thing that catches your eye is that government bond yields are soaring, mainly for long-term bonds. In the case of 10-year products, it rose to the level of 1.185% per year at one time during the week last weekend, returning to the level just before the corona crisis.

As interest rates on U.S. Treasury bonds skyrocket, other financial markets are also changing. The value of the dollar, which was expected to weaken after the inauguration of the Biden administration, turned to strong.

The biggest reason for the soaring Treasury yield is due to concerns that the issuance of deficit Treasury bonds will be inevitable as central banks’ monetary policy capacity is low, but fiscal roles are more important. The US is considering the issue of deficit Treasury bonds in the US as an act of action by Finance Minister Janet Yellen, and in Korea to compensate for the damage caused by the corona crisis.

The rise in inflation expectations due to the aftereffects of the ultra-financial easing policy is also a factor in soaring government bond yields. Expected inflation in the US exceeds the inflation target of 2%. At the US Central Bank (Fed) meeting in September last year, if the average price target system was not introduced and the price level target system was maintained as it is, the debate that’tapering’ should be promoted could intensify.

In order to maintain the efficiency of the financial market in a specific country, the system between the base rate and the market rate must be maintained and functioning well. When the’Greenspan mystery’, in which the market interest rate decreases even when the base rate is raised as in 2004, or the’Powell puzzle,’ in which the market interest rate rises even when the base rate is lowered, as in recent years appears, the central bank is embarrassed and market participants are confused.

Rather, the situation as it is now can be more dangerous than right after the corona crisis. Raising the benchmark interest rate in line with the rising market interest rate could lead to a further downturn in the economy and the job market, leading to a’Eccles mistake’. If the benchmark interest rate is lowered further to stabilize the market interest rate, the possibility of making a’greenspan mistake’ that raises the asset bubble and causes another crisis increases.

Monetary policy objectives and priorities need to be examined in order to find out what course the Fed will take in the current circumstances where the probability of making two mistakes coexist. Since 2012, the Fed has set the two main responsibilities by adding’employment creation’ to the traditional goal of’price stability’. When the two targets collide, the latter has been prioritized and monetary policy has been used.

Currently, the unemployment rate is more than twice the employment target. What is more worrying is that the stereotypical inverse relationship between growth rate and unemployment rate is deteriorating into a “harder economic recovery without job creation” structure in which the unemployment rate does not drop even if the growth rate rises due to the sharp increase in the number of permanently unemployed people who are completely expelled from their jobs after the corona crisis.

Even if inflation expectations, government bond yields rise, and asset bubble concerns are concerned, it is not easy for the Fed to change its monetary easing stance under the condition that prioritized employment targets are not achieved. It is also the basis for the’economic normalization paradox’, asserted by Professor Nouriel Rubini of New York University as’the irreversibility of monetary policy’.

The question is how to deal with expected inflation and rising government bond yields, which are more likely to rise if the financial easing stance continues. As a matter of fine adjustment, the Fed is expected to adjust to the average price target system adopted in September last year and the’operation twist’, which was a three-stage quantitative easing measure after the financial crisis.

In the average price target system, considering that inflation after the corona is below the target line, even if a situation exceeds it, it is tolerated and does not turn to tightening immediately. In the case of Operation Twist, as with’Paygo’ in fiscal policy, purchasing long-term Treasury bonds with the source of selling short-term Treasury bonds can stabilize long-term Treasury yields without increasing liquidity.

In recent years, it is unlikely that the stock market’s most worrying taper will be promoted along with the rise in government bond yields. It is highly likely that the nightmare in November 2018 will revive if the Bank of Korea, which has responded passively after the corona crisis, raised the standard interest rate as some of the Monetary Committees, conscious of real estate measures, leading to an economic downturn. The task that needs to be addressed urgently is to change the price level target system to the average price target system.

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