Financial market changes are also happening

Financial market changes are also happening faster than in any other year. In particular, as I mentioned in last week's essay, the Fed's slight change in stance seems to be more pronounced now. Last week, some of the hawks in the Fed, President Lori Logan, hinted at a change in stance. The key point is that, because market rates are rising quite a lot now, the tightening effect of rising market rates increases, and if this happens, the Fed will not have to raise its benchmark interest rate. Yes, it has the effect of lowering the possibility of further rate hikes by the Fed. Since then, hawkish vanguards such as Waller have said something similar, and dovish members have mentioned the tightening effect of higher market rates, and now it felt like we were declaring an end to the rate hike cycle by saying that we should focus on how much we should maintain the current high rate. Are hawks and dovish united after a long time? lol

A similar situation happened between October and November of last year. Powell, who turned the market upside down with an eight-minute speech at Jackson Hole in late August, created Volcker momentum, a fear in the market that the so-called Volcker is back. Four 75bp rate hikes in a row left the market frozen properly. Stocks plummeted and market interest rates and the dollar were skyrocketing, raising the possibility of a recession caused by a typical interest rate shock. Well, changes started to show a little bit here. In fact, at the FOMC in early November 2022, when he actually made the last 75bp hike, Powell showed a sharp change in two months from that cut in late August. So we split the rate hike into three steps. How fast, how high, how long it lasts. And then we split it into three steps, and then we started dropping it "how fast." Yes, to tighten and to signal easing… The program of raising interest rates was divided into three categories.

The market, which was waiting for the relief of the wild Fed, welcomed it with great enthusiasm. It's a slight change, but in the end, we saw that our Fed began to show its true colors. And that the end of the rate hike is not long, and that after seven months, the base rate cut is made without fail. ... If you look at the patterns in the past, it goes up slowly when you raise interest rates, but it comes down very quickly when you come down. A quick rate cut is just around the corner. If so, you can't give up now... And that led to a rush of money into the asset market. Anyway, the Fed didn't even suggest a pivot, but as soon as Powell put it down, the market started to act with confidence in the pivot, which led to a super strength in asset prices through the first half of this year.

It seems that it was actually beyond August that dampened market pivot expectations. As the consumer price index rolled up its tail again, there were concerns that inflation would continue for a considerable period of time, and when it was off in June but raised again in July, market participants gradually began to believe in Higher for Longer. And the interest rate on long-term U.S. government bonds began to soar rapidly. But… Once interest rates have risen, the rate of increase is increasing... If interest rates rise this quickly, panic concerns in the government bond market will grow, and as they rise to unexpected levels, there may be an overkill that is completely different from the Fed's intentions. The Fed, which has been intimidated by this, is once again trying to soothe the market. However, since we cannot ease while loosening austerity... You have to use that approach of tightening while also talking about easing, which in November of last year divided austerity into three phases, which gave easing in tightening, this time the Fed started to break down interest rates, which is one of the determinants of long-term government bond rates, which is the term premium. And the governor, Lori Logan Dallas, said the first thing he did was that a rise in term premiums would trigger a rise in long-term government bond rates, which could lead to a stronger tightening effect.

But... there's one thing we need to be careful about. If the Fed throws a little signal like this, that signal alone can be a huge boon to the market that's been waiting for. Everyday... Today is the peak of interest rates. Hang in there. Wouldn't it be very welcome to say that the need for an additional rate hike by the Fed has decreased for some reason? And this will be immediately reflected in the market reaction. The 10-year U.S. government bond rate, which once exceeded 4.85% and was on the verge of 5%, fell sharply to the early 4.6%.

The term premium is when you eventually invest in long-term government bonds, etc… Because we don't know how long-term government bond rates are going to change over that long period of time, so we're going to give you a higher interest rate, or a higher interest rate, or a higher interest rate, than a one-year deposit, so the five-year deposit rate is going to go up over the next five years, so maybe it's not a good option to fix the interest rate at five years now... as long as it's tied up over a long period of time... It's a concept of giving a premium. In this period, the premium has been very low since the global financial crisis, as low-growth, low-price, low-interest rates have become entrenched. Prices and interest rates can rise… So I'm going to answer investors who say, "Please give me a premium." Interest rates are not going to rise forever. I put prices at the water's edge. Do you think growth is going to come out… And if interest rates want to go up, the Fed comes in right away and quashes the rate increase with quantitative easing. How can interest rates go up? That's why the term premium was almost at the bottom.

Well, the atmosphere has changed. Inflation is here for the first time in 40 years… And yet growth is solid. And the Fed, which had started to release money at this rate in the past, continues to raise interest rates, threatening Higher for Longer, and quantitative easing is just... quantitative tightening, so you believe that the Fed has the will to suppress prices. So then ... And the uncertainty about future interest rates is increasing, so it's going to give a term premium to long-term bond investors. Yeah, as Logan said, the Fed's commitment to tightening is reflected in the market, so the term premium is going to go up, and the long-term interest rate is going to go up. And the long-term interest rate that's gone up creates a tightening environment.

By the way, what will happen if the Fed stops raising it further in the face of such a tightening environment? The reason why long-term interest rates have gone up is because the market is starting to believe that the Fed is going to tighten. But the Fed stops raising interest rates here? Then the market will again have doubts about its will to tighten. What if the term premium goes down again? Then, will the pivot expectations be in full bloom again? The pivot expectations that have appeared since November of last year... Despite the additional base rate hikes in December, January, March, and May, the market showed a sharp decline in market interest rates. And the asset market had a big impact as this lowered market interest rates created a relaxed environment. So Karikari, the highest hawk in the Fed, says.

"It is certain that the rise in long-term yields helps us in part in lowering inflation," Minneapolis Fed President Neal Kashkari said at a town hall meeting, agreeing that rising government bond yields have a tightening effect.

"But if the increase in long-term yields is due to a change in their (market) expectations of what we're going to do, we may actually have to follow their expectations to maintain that yield. Kashikari is one of the hawkish members." (Yonhap Infomax, 23.10.11)

In the first paragraph, Kashkari says that long-term interest rate increases help to suppress inflation, but the reason why long-term interest rates have risen since then is because... They say it's because there's market expectations that the Fed will continue to tighten. That's why the Fed is not stopping tightening. It's saying that we still have to continue tightening stance so that those market expectations don't get dampened again. This similar story was reported in the Wall Street Journal yesterday. I'm quoting the same.  

"WSJ argued that it is dangerous for the Fed to make interest rate decisions by the market. The media said that the Fed will have no choice but to react if the market moves strongly, but the idea of fine-tuning its policy is too peripheral, pausing a 25-bp rate hike just because government bond rates have risen slightly more than expected.

In addition, the WSJ pointed out that it did not feel the need to take the opposite measure when government bond rates fell enough to offset the Fed's quantitative tightening at the end of last year. The media analyzed that in January, the U.S. 10-year Treasury bond rate plunged to 3.4% from 4.2% in October last year, reducing the Fed's quantitative tightening effect. The WSJ observed that focusing on financial conditions, not government bond rates, will lead to an argument that interest rates should be raised further, contrary to the Fed's new credo.

Financial conditions indexes from the Federal Reserve Bank of Chicago (Federal Reserve) and Goldman Sachs show that despite the recent surge in government bond rates and the Fed's 25-bp rate hike, the overall impact of finance across the economy is less constrained than it was a year ago." (Yonhap Infomax, 23.10.13)

It's important to stop raising interest rates just because long-term interest rates have risen... Let's say it's peripheral in the first paragraph. If you look at the second paragraph... Last year, we had to raise the benchmark interest rate