Industry·Finance: Economy: News: Hankyoreh Mobile

The Dow and S&P 500 indexes rewrite all-time highs as the Federal Open Markets Commission (FOMC), which determines US monetary policy, stabilizes the sentiment of market participants. The Nasdaq Index, which fell by more than 10% in February, also rebounded a lot due to rising interest rates arising from inflation concerns. The next day, doubts spread over whether the Fed had tolerated inflation, and the stock price fell mainly due to growth stocks that are vulnerable to rising interest rates, but the stock market is still moving around its peak. Summarizing the results of the March Federal Open Markets Committee meeting in a nutshell,’the economy is expected to improve much faster than originally expected, but the current policy stance will not change for a considerable period of time’. In fact, the Fed raised its growth forecast this year from 4.2% to 6.5%, and lowered its unemployment forecast from 5% to 4.5%. It’s not at the full-employment level, but it’s enough to read the optimism about the economy. However, it is said that the policy rate and asset purchase rate will be maintained for a while, which is currently 0~0.25%. The economy is running toward normalization, but the normalization of monetary policy has been delayed.

As a result, many economists and investors who consider it a natural and even justifiable thing to proceed with the normalization of the policy along with the normalization of the economy are quite embarrassed. In particular, the Fed raised its inflation forecast to 2.4%, which exceeded the policy target of 2%, and there are criticisms that the Fed is irresponsible and claims that the balance between growth rate, inflation and policy interest rates is not correct. This is a natural argument and criticism in that if the imbalance persists, it can lead to negative consequences such as an asset bubble and a surge in inflation. So, why did the Fed’s monetary policy officials make this decision? Is it because they are less aware of the negative consequences of imbalance than experts in academia and the marketplace? It seems unlikely that it was. This is because the Fed has more micro and macro data and more experienced experts than anyone else, and has long experience in the market. Thus, this decision shows that the Fed is more focused on the economic dependence on policies and the semi-permanent impact on the job market than on rising inflation. In fact, after the coronavirus outbreak, the global economy as well as the United States was shocked for the first time in history, but in the second half of last year, it began to recover at a much faster rate than many thought. These effects will continue until this year. However, if you look closely, this recovery is largely due to the policies of the government and central banks. The $1.9 trillion stimulus package promoted by the Biden administration reached 8.8% of the U.S. nominal gross domestic product (GDP) in 2020, and the Fed’s asset purchases amounting to $120 billion a month were 6.7 of the nominal GDP. %All. However, despite such large-scale policies, it is still unclear whether the US growth rate recovery will continue beyond this year and into next year. The number of non-farm employees in the United States, which has declined due to the crisis, is still close to 10 million, many of whom are likely to remain unemployed for a long period of time. In addition, the authorities directly or indirectly extended debt repayment for many companies, but at some point, restructuring in this part is inevitable. It means that there is a high possibility that a more serious polarization will proceed than the polarization caused by the rise in asset prices caused by low interest rates. Of course, the Fed may have made a mistake. As the price of real assets rises faster than the value of money due to extreme policies, there is a possibility that the expectation that the general price level will rise eventually will increase, and accordingly, the price of fixed interest bonds may fall in the future. And if interest rates rise rapidly, both investors and real economic activity will contract. Rising interest rates increase the cost of financing people and increase demand for safe assets. If this process proceeds quickly, the Fed’s policy will eventually fail. The rising interest rates and the volatility of the stock market now appear to reflect concerns over the failure. However, if the Fed’s judgment is correct, as in many times of the past, inflation will be temporary and interest rates will only rise to levels the economy can tolerate. In addition, the growth rate and the job market will face shock and maintain a slow but steady recovery. If so, even if the pace slows, the stock market is likely to maintain an uptrend. This is because the economic recovery and corporate performance will increase. Now is the time for the investment results to differ depending on the Fed’s success or failure, and which one is highly likely. Seok-won Choi, Director of SK Securities Research Center