Meaning of the Remark, "We Have Work to Do"

The host reported that Kevin Warsh stated, 'I am confident that underlying inflation is moving clearly and sufficiently quickly towards target. If not, we have work to do.' This remark emphasizes confidence in underlying inflation reaching the target, while also revealing a hawkish intent to take additional measures if the target is not met. The market is divided on this remark, seeing both positive aspects of strengthening Fed credibility and managing risk, and negative aspects of foreshadowing stronger tightening.

Research Fellow Park Jun-woo emphasized that the Jackson Hole remarks were an evaluation of the direction of monetary policy rather than a positive outlook on stock market returns. He assessed the remarks as positive, if anything, and analyzed that the Fed intended to present a systematic and principled monetary policy path. He added that clearly demonstrating the commitment to price stability has the effect of reducing policy uncertainty.

Research Fellow Park Jun-woo cited the case where, after Kevin Warsh's dovish remarks at the July FOMC, short-term interest rates fell and long-term interest rates rose. He explained that the Fed issued hawkish-sounding remarks at Jackson Hole because it recognized that long-term interest rates could surge again if it spoke dovishly. Park stated that this was ultimately a choice to induce short-term interest rate hikes rather than long-term interest rates.

Research Fellow Park Jun-woo diagnosed that preventing interest rate increases themselves is very difficult. However, he stated that by inducing short-term interest rate increases, it is possible to defend against a situation where long-term interest rates surge indefinitely, and this can be interpreted as a choice to avoid the worst-case scenario for the stock market. This means that policymakers are attempting a balanced approach to prevent a sharp shock to the stock market.

Research Fellow Park Jun-woo explained that the expression 'stopping it with a hoe before needing a shovel' came up at the recent Monetary Policy Board meeting, which is similar to the message the Bank of Korea is sending to the Fed. That is, it showed a nuance of trying to preemptively stop a problem that could become uncontrollably large later with a small tool now. This indicates a strong commitment by central banks to manage risks in advance.

Research Fellow Park Jun-woo pointed out a recent discrepancy in policy stances between the Fed and the Treasury. In normal situations, it is appropriate for the Fed to use short-term interest rates as its main policy tool and leave long-term interest rates to the market. However, in crisis situations, it has pursued policies that arbitrarily adjust long-term interest rates through quantitative easing. Park analyzed that the Treasury's artificial intervention in long-term interest rates has caused the Fed's policy steps to get tangled.

Research Fellow Park Jun-woo assessed that while stock prices underwent some adjustment with the rise in short-term interest rates, this adjustment is actually at a healthy level. He added that interest rate increases are likely to continue until risks become clearly visible. This suggests that the market is undergoing a healthy adjustment process without overheating.

Research Fellow Park Jun-woo explained that Treasury bond yields do not simply react by the number of policy rate hikes. The market always tends to overshoot when interest rate hikes begin, and even if the policy rate outlook is for two hikes, the market may pre-reflect three or four hikes, he warned. Therefore, there is a risk of further increases in market interest rates in the early stages of rate hikes due to uncertainty.

Research Fellow Park Jun-woo predicted that if the US policy rate is raised about twice, stock prices could undergo an adjustment of approximately 10%, justifying a healthy correction. He analyzed that such an adjustment, considering fundamentals, is more likely to act as a buying opportunity rather than leading to a market downturn. He explained that while short-term adjustments are inevitable, they can be seen as a positive sign from a long-term perspective.

Research Fellow Park Jun-woo identified a month-over-month increase of 0.2% in core CPI (Consumer Price Index) or PCE (Personal Consumption Expenditures) as the most important indicator for judging inflation trends. He explained that if this figure exceeds 0.2%, it means inflation is not being controlled well, and if it falls below 0.2%, it can be judged that inflation is converging to the target of 2%. This serves as an important benchmark for assessing whether the Fed is achieving its inflation target.

Research Fellow Park Jun-woo conveyed that Kevin Warsh strongly emphasized the importance of 'trends.' He stated that one should not get overly engrossed in two or three short-term indicators, but rather judge the overall direction, or trend, of inflation and employment indicators as more important. This suggests that understanding long-term trends is more crucial for monetary policy decisions than reacting to short-term volatility.

Research Fellow Park Jun-woo explained that the phenomenon of increasing loans despite rising interest rates demonstrates economic agents' confidence. He analyzed that economic agents tend to take out more loans when there are positive outlooks, such as expectations of rising real estate prices, improved income conditions, and businesses' expectations for prosperity. This shows that 'Animal Spirits' across the economy are becoming active despite rising interest rates.

Research Fellow Park Jun-woo explained that AI development is inducing intensive investment in specific areas, and such investment has the effect of stimulating the economy and pushing up prices in the short term. He diagnosed that the market is currently more concerned about inflation caused by AI development rather than disinflation (slowing inflation rate). He added that a complex perspective on the economic ripple effects of AI technology development is needed.

Research Fellow Park Jun-woo emphasized that the velocity of money has a greater impact on the economy, and explained that transactions by non-bank financial institutions and bond issuances affect the velocity of money. He pointed out that when analyzing the economy, it is important to look at various indicators such as the velocity of money, multiplier, and growth rate, in addition to M2 (broad money). This means that how quickly money circulates is an important variable in economic activity.

Research Fellow Park Jun-woo explained that the Trimmed Mean indicator, which excludes extremely high or low items from inflation and only looks at the median, is useful for grasping trends. However, he pointed out that it has the disadvantage of not quickly reflecting recent price changes because it excludes volatile items like energy and food. He also added that looking at the proportion of items exceeding 3% in recent times means that inflation has not yet been fully contained.

Research Fellow Park Jun-woo emphasized that rather than getting too fixated on inflation figures with excessive precision, it is important to view inflation in the 2% range as the dividing line for market stability. He stated that even if inflation is reported at a decimal point like 2.43%, it is generally rounded to and recognized as being in the 2% range. This implies that the Fed prioritizes reaching a broad range of stability rather than an overly precise target.

Research Fellow Park Jun-woo mentioned that the Bank of Korea reiterated the expression 'we used a hoe this time to stop it with a hoe, not a shovel' in response to raising interest rates again after July. This demonstrates the Bank of Korea's preemptive policy intention to promote long-term interest rate stability even at the expense of short-term interest rate increases. It is interpreted as a strategy to minimize economic shocks by responding in advance before problems escalate further.

Research Fellow Park Jun-woo explained that if semiconductor exports are strong, the most important factor is how this positive effect will spill over into domestic demand. He stated that signs of this domestic demand spillover are already appearing, especially centered on various facility investments. This suggests that the semiconductor industry's boom can have a positive impact on the overall domestic economy, and that facility investment will play a crucial connecting role.