U.S. Government Deploys Full Arsenal of Interest Rate Cut Tools… Pursuing Debt Management and Economic Growth Simultaneously

Park Jun-woo, research fellow, emphasized that the U.S. government possesses all tools to lower interest rates, including quantitative easing, bank deregulation, and capital outflow controls. He asserted that if the government is determined, it can lower the 30-year bond yield to the 4% range, suggesting that, contrary to market concerns, the government has powerful means to reduce interest rates.

He stated, "The government has all the tools to lower interest rates, such as quantitative easing, bank deregulation, capital outflow controls, and research interest rates. In fact, if it wants to, it can lower the 30-year bond yield to 4% now."

During World War II in the 1940s, the U.S. government rapidly increased Treasury bond issuance to finance the war, and in this process, it implemented Yield Curve Control (YCC) even at a cost. At that time, artificial interest rate controls were enacted, such as fixing the 10-year bond yield at 2.5% and preventing it from rising higher.

Such policies were achieved through the exchange of marketable and non-marketable securities, and are considered a historical precedent demonstrating the government's ability to implement strong interest rate control policies when necessary.

Park Jun-woo, research fellow, evaluated the current U.S. government's Treasury buyback policy as very weak. He analyzed that it merely involved a slight increase in the existing buyback volume, and the government is attempting to shape market expectations through verbal intervention.

He predicted that if interest rates continue to rise, the government will inevitably have to use stronger policies such as YCC, viewing the current approach as an attempt to minimize market impact.

Previous research shows that in developed countries, when the government debt ratio exceeds 100%, there is an upward trend in the relationship between central bank Treasury purchases and the debt ratio. This implies that once government debt surpasses a certain threshold, the central bank inevitably becomes actively involved in debt management.

The central bank can control Treasury purchases not only directly but also through commercial banks. While this relationship is not significant when the government debt ratio is low, it becomes clearer as the ratio increases.

In Japan, for example, 60-70% of government debt is held by the central bank and commercial banks, demonstrating that such controllable Treasury purchase methods are already in practice.

As the U.S. government debt ratio reaches approximately 100%, market doubts about the sustainability of government finances are intensifying. This situation may necessitate a policy response similar to the European Central Bank's purchase of Italian government bonds during the eurozone financial crisis.

Park Jun-woo, research fellow, analyzed that once the government debt ratio crosses the critical threshold, policies aimed at stabilizing and lowering interest rates will become an inevitable choice.

One extreme policy the government could consider is the issuance of perpetual bonds. While existing 10-year, 20-year, and 30-year maturity bonds create continuous refinancing risks, perpetual bonds continuously provide funding with a single issuance, thereby eliminating refinancing risk and mitigating risks associated with rising interest rates.

The market may interpret the issuance of perpetual bonds as virtually forced asset ownership, and concerns are raised about the potential difficulty of free trading within the market.

Inflation and a decline in the value of the dollar are identified as side effects of interest rate reduction policies. Immediately after the recent buyback announcement, the market mechanically saw gold and Bitcoin prices rise, the dollar weaken, and the stock market strengthen.

This suggests that as the attractiveness of U.S. Treasury bonds declines, investors are turning to alternative assets such as gold and Bitcoin.

Park Jun-woo, research fellow, explained that rising interest rates are inevitable during periods of growth, stating that there is a difference between his perspective and that of stock investors. While stock investors prefer lower interest rates, he believes that when the economy is good and stock prices are rising, interest rates naturally increase as a reaction.

The current rise in interest rates in the U.S. and Korea largely reflects robust growth, and the performance of semiconductor and big tech companies, in particular, continues to demonstrate growth.

The U.S. Federal Reserve (Fed) is expected to adopt a strategy of slightly raising benchmark interest rates in the future. This is aimed at curbing long-term interest rate increases and addressing criticisms that it is failing to control inflation, but at the same time, it is expected to raise rates only to an extent that does not stifle risk assets or economic growth.

The Fed is observed to be adjusting the pace of interest rate hikes to achieve a level that can stabilize inflation by convincing the market, while also avoiding negative shocks to the economy.

Policies such as Treasury buybacks, which the Treasury Department can pursue independently without congressional approval, are expected to maintain continuity regardless of the midterm election results. These policies are already underway or in preparation, and will not be significantly affected by changes in the political landscape.

However, Park Jun-woo, research fellow, added that if the growth outlook deteriorates, separate consideration of policy implementation capacity would be necessary.