Successive giant steps... A good recession
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As the financial markets rebounded last month, which had been hesitant from central banks' base rate hikes in response to inflation, expectations are rising that stock prices have bottomed out and have returned to a full-fledged upward trend.
The KOSPI closed at 2,452, rising throughout the past week.
It rose 7.6% from the low recorded on July 4, and increased by 5.09% from the end of June.
The Dow Jones Industrial Average rose 6.7% in July and the Nasdaq Composite rose 12.4%, the best month in more than two years.
The US stock market, which had its worst first half in 52 years due to a sharp interest rate hike by the US Federal Reserve, rebounded in the first month of the second half, largely due to the high performance of oil giants such as Apple, ExxonMobil and Chevron.
In addition, Federal Reserve Chairman Jerome Powell announced on the 27th of last month a 0.75 percentage point increase in the base rate, a rather moderate announcement that the rate of interest rate increase can be adjusted according to inflation and economic conditions, thereby easing frozen investor sentiment.
In addition, as the US economy grew negative for the second quarter in a row, expectations were also raised that the US Federal Reserve might be adjusting the pace of monetary tightening.
The US Federal Reserve raised the benchmark interest rate from 0 to 0.25% at the beginning of the year by 0.25%p in March, 0.5%p in May, 0.75%p in June, and 0.75%p in July.
The US base rate is 2.25-2.50%, higher than Korea's base rate of 2.25%.
Although there were concerns that foreign investment funds could escape due to the inversion of interest rates in Korea and the United States, foreign investors have not shown any significant movement yet.
The US Federal Open Market Committee (FOMC), which took the giant step of a 0.75 percentage point hike for two months in a row, will not be held in August.
As the FOMC is scheduled to take place on the 20th and 21st of September, the fact that there will be no monetary tightening action by the US central bank for the next two months gives support to the prediction that the relief rally will continue for some time.
An unabated trend of rising prices... "At the end of the year, the US base rate will go down to 3.5%"
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The U.S. Personal Consumption Expenditure (PCE) price index for June, released by the U.S. Department of Commerce last Friday night, rose 6.8% from a year ago and 1.0% from a month ago, the highest in 40 years since 1982. recorded
It was the same period when high inflation appeared due to the second oil shock that was driven by the Iranian revolution in 1979.
Excluding volatile oil and food prices, the core PCE price index rose 0.6% MoM and 4.8% YoY.
The figures are 0.1 percentage points higher than the estimates of experts compiled by the Dow Jones.
After the Consumer Price Index (CPI) surged 9.1% in June announced by the U.S. Department of Labor, the personal consumption expenditure (PCE) price index, which the U.S. Fed mainly refers to, also surged. The likelihood of taking it has increased that much.
The U.S. employment cost index (ECI) rose 1.3 percent in the second quarter, released by the U.S. Department of Labor, to match the 1.4 percent in the first quarter, the highest level since statistics began to be compiled in 2001.
This means that the wage increase is so steep.
The Bank of Korea will hold a Monetary Policy Committee meeting on the 25th of this month to decide how much to raise the base rate, which is currently 2.25%.
The Bank of Korea, which raised the benchmark interest rate by 0.5 percentage points for the first time in history on the 13th of last month, is expected to have no choice but to raise Korea's base rate, which has been lower than the US base rate.
As the US is expected to raise the key interest rate by at least 0.5%p at the Federal Open Market Committee (FOMC) on September 21, it is also predicted that the BOK will raise the interest rate by 0.5%p again.
Both the central banks of the Republic of Korea and the United States hold public meetings eight times a year to set the base rate.
The US has three FOMCs left in September, November and December this year.
The Bank of Korea holds the Monetary Policy Committee in October and November following the Monetary Policy Committee in August.
As the US is expected to raise the base rate to 3.5% at the end of the year, the Bank of Korea is expected to have no choice but to raise the base rate of Korea, which is currently 2.25%, to the level of the US base rate by raising the base rate by more than 1.25%p within this year.
Federal Reserve Chairman Jerome Powell announced a rate hike on the 27th of last month, saying another big rate hike may be necessary in September.
The U.S. Federal Reserve reduced its assets by $47.5 billion per month from June to August, and from September to a month from September. It also said that the tapering, which will reduce the amount by $95 billion, will proceed as scheduled.
Considering that monetary policy takes up to two years to take effect, the Fed's monetary tightening will continue into next year, which is expected to put pressure on the asset market for a considerable period of time.
Can stagflation be avoided? The turbulent path of the global economy
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Irving Fisher, an American economist, said that while running a company, he ran a test in which he paid his employees according to the rate of inflation.
Inflation raises salaries when prices rise, and decreases salaries when prices fall.
Fisher discovered that employees like to raise their salaries due to inflation, but dislike them when they lower their salaries through deflation, which he describes as the Money Illusion.
In terms of purchasing power, there is no difference in salary, but when the amount of money received is small, people dislike it, and when it increases, they like it.
This year, central banks around the world have become snipers in the financial markets to keep the value of money falling due to inflation.
Not only the US, but also the European Central Bank (ECB), which applied negative interest rates, raised the benchmark interest rate and pulled stock prices down.
Central banks in early 2020, amid fears of the worst economic downturn since World War II due to the global pandemic of COVID-19, released unlimited money as if they were flying money from a helicopter, which is the exact opposite of what fueled the stock and real estate markets. it is showing
Investors are caught up in the illusion of money and show their hostility when they try to increase the value of money while showing interest in central banks that have caused inflation.
The latest moves by central banks around the world are in response to concerns that if inflation is left unchecked, inflationary sentiment will prevail, leading to uncontrollable inflation and chaos in the global economy.
This is a desperate measure to keep the value of money in check by suppressing inflation.
The increase in inflation since the end of last year is also responsible for the reduction in supply capacity due to the Ukraine crisis and the Corona 19 pandemic, but above all, it is interpreted as a phenomenon that occurred as central banks around the world released money on a huge scale to overcome the Corona 19.
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In response to the 2008 financial crisis, the US Federal Reserve implemented quantitative easing (QE) for the first time in history, increasing the size of the Fed's assets from US$1 trillion to US$4 trillion.
And in the process of coping with the 2020 COVID-19 pandemic, the Fed's assets have grown to $8.9 trillion.
While the Fed lowered the base rate to zero and bought government bonds and mortgage bonds in the market, it saved $4.9 trillion, or 6,400 trillion won, in Korean money over two years.
It is also interpreted that the released money flowed into the stock, real estate, and commodity markets, causing inflation.
Although the US Federal Reserve started inflation in October of last year, it judged that it was a temporary phenomenon and began tightening monetary policy only in March.
In response to criticism that the diagnosis and measures for inflation have been delayed, the Fed's measures against inflation are proceeding as strongly as possible.
It is a policy to stabilize the price of goods by lowering house prices and reducing demand even if stock prices fall.
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The U.S. Federal Reserve (Fed) says the U.S. economy is not in recession yet, even as it tightens policy by raising interest rates and reducing the money supply.
We want the best results in the fourth quadrant of the table above, which stabilize prices without causing a sharp contraction in the economy.
However, the U.S. economy is currently experiencing a slowdown in consumption while inflation continues to rise.
Concerns about inflation and stagflation amid a recession are growing.
The situation corresponds to the 2/4th side in the figure above.
When inflation occurred due to the oil crisis in the early 1980s, then Fed Chairman Paul Volcker succeeded in controlling inflation by raising the key interest rate from 5% to 19%, but it caused a sharp economic contraction.
In the figure above, the result corresponds to the third quarter.
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It's unclear what the outcome of the Fed's strong monetary tightening to tackle inflation, the first in 40 years, will end.
One thing is certain, however, is that an economic slowdown is inevitable due to monetary tightening, and when an economic slowdown occurs, the dominance of economic agents with strong and strong market power will be further strengthened, and companies and households with weak basic physical strength will inevitably be eliminated.
The central bank's monetary policy goal is to create maximum employment while maintaining monetary value and to achieve financial stability.
However, the effect cannot be guaranteed, and the outcome of a monetary policy that takes a long time to take effect cannot be guaranteed.
Central banks around the world are now focusing their monetary policy on maintaining the value of their currencies rather than job creation and market stability.
It is a situation that cannot be said to be favorable to financial market participants.