The November market was really hot.

The November market was really hot. The comments that the market wanted… It seems like the market is really crazy to throw it a little bit. In response, the Fed and other central banks aren't thinking about listening to it at all even if they're warmed up to stop a market that's going too far.

Let's say there's a doctor and a patient. He's hospitalized. He'll be waiting for the day he leaves. The doctor says, for example, how far down does it have to go before he can leave the hospital? So one day when he's been spending that time, his sugar levels are down quite a bit. So what does the patient think? He won't be able to sleep thinking that the discharge day is numbered. But is the doctor so excited? Wouldn't he be so cautious about the idea that it could be temporary, and that he could run again at any moment? Well, everybody wants to be discharged sooner than the doctor thinks. No. The market, which is in so much pain from raising interest rates, would want to cut rates a little bit faster. No. The Fed, or the central bank, would want to cut rates faster than it wants. On the other hand, the Fed would want to be wary of inflation that could bounce back, or fear of deflation slowing down, or maybe looking at it a little bit more carefully, finally. So the patient and the doctor's dream -- and the Fed and the market's dream -- begins. The best thing is that the doctor didn't expect ... the Fed didn't expect ... inflation to heal itself, but that hasn't happened in previous clinical trials.

There was a speech by Chairman Powell the day before. The context is the same. It is true that the current interest rates are at a constrained level, but there are too many markets that expect a rate cut. No one in the Fed expects a rate cut, either. Of course, the market is very happy just to say that Waller's hawkish payoff is a rate cut. The doctor said that if you are really lucky, you could be discharged sooner than expected... not the doctor's prediction. The patient changes his or her mind.. It comes to a faster time than expected. Then, I dream. I wonder if I can go out early in the month. At the Monetary Policy Board in December this week, the BOK Governor's comments show that efforts to block expectations for a rate cut in advance are noticeable. And President Lee Chang-yong says this. Even if I meet with central banks in other countries and talk to them, I feel that the market is ahead. Yes, I think it's true that the market is expecting too much.

I explained this gap in my essay last Friday, and I talked about the ECB along the way. And the market is expecting that the ECB will cut its benchmark interest rate in April, because growth is slower than it is in the United States, so they think that it's essential to cut its benchmark interest rate. And the ECB is confident that it will have no choice but to meet these market expectations. And so Lagarde comes out and gives a word. I don't think we're going to cut interest rates… But I don't think this is going to work… So, you're a little bit off. There's no change in monetary policy in the next two quarters… We talked about that in November… So, two quarters… six months ago, they actually gave forward guidance that we're not thinking about cutting rates until at least May next year.

But the market is interpreted in two ways. One is that you don't believe it. Look, this time you're gonna get Lagarde wrong. The other is that you're gonna get it off in June. ^^* Thank you~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.

Then Lady Lagarde goes a little harder. She says she'll do quantitative tightening, which she's only doing for APP, and also for PEPP. The quantitative easing that was going on before COVID-19 was APP. After COVID-19, PEPP was the one that carried out additional quantitative easing in the face of emergencies. Now, the government bonds that were purchased through PEPP. When these government bonds mature, they'd buy them back and reinvest them. Yes, I've been extending them when the deposit expires. Now I'm going to consider reducing the proportion of extensions little by little. Yes, in fact, it's raising the quantitative tightening of PEPP. I'm quoting an article for a moment.

"Lagarde 'Never discussed early termination of PEPP reinvestment'" (Joint Infomax, 23.10.27)

At the ECB meeting in October, I was not going to think about ending this early... that is, we didn't discuss quantitative tightening of PEPP. All of a sudden, the atmosphere changes like this in a month. I quote.

"Lagarde Will Revisit Early Termination of Bond Purchases"... Implications of Quantitative Austerity" (Edaily, Nov. 28, 23.)

This makes it a little ambiguous. In the past, when interest rates were raised after interest rate cuts and quantitative easing, quantitative easing was stopped... We used to raise the base rate by performing quantitative austerity. On the contrary, when interest rate hikes and quantitative tightening were completed, quantitative tightening was stopped first... and interest rate cuts were started. But… I think we will cut the base rate in the near future. We will strengthen quantitative tightening? We need to stop quantitative tightening and start lowering the base rate. We have to strengthen quantitative tightening in a situation where the base rate is expected to be cut. It's a completely different move from the past. The central bank sends a signal of tightening through quantitative tightening, and at the same time sends a signal of easing through a base rate cut. So, what does the market feel like when it receives the opposite signal? Wouldn't it be confused?

Some investors are confused, but others interpret it this way. The ECB's rush to quantitative tightening is the cornerstone of interest rate cuts. The logic is that if you start quantitative tightening while cutting interest rates, people will get more confused, so you will do quantitative tightening before interest rate cuts. Personally, I was surprised to hear this logic. Whatever you do… It makes me think that investors are connecting everything to solving money. Even if you raise interest rates further… It seems like that logic. If the central bank goes back and forth too much, and shows too much anxiety about the economy, the market loses confidence in their austerity measures. Then, as policy confidence declines, the effect of the central bank's policy, especially the tightening effect, becomes significantly lower. The main reason why asset prices are so hot when interest rates are so high… I think it's because the central bank's confidence in austerity is quite low. So Powell doesn't mind much if he gives a warning in his speech.

Anyway... whatever the market thinks... we can have these kinds of concerns. So are we not going to cut interest rates? I don't think so. We've talked about the ECB up until now. The Fed is talking about something similar. Let's read it for a second. It was in the FOMC minutes last November.

“A few participants noted that the process of balance sheet runoff could continue for some time, even after the Committee begins to reduce the target range for the federal funds rate.”(10월 FOMC 의사록)


"A small number of commissioners have stressed that the current quantitative tightening could continue for some time, even after the FOMC began cutting the Fed's benchmark interest rate..." (from FOMC minutes in November 2023)

Yes. The Fed is already carrying out quantitative tightening. In the past, before it shifted to a rate cut, quantitative tightening was stopped first before the rate cut, considering that the opposite signal would be thrown to cause confusion. But as you can see in the minutes, even if the base rate is cut this time, quantitative tightening can continue. Then the conflicting combination of interest rate cuts and quantitative tightening for the first time in history can be realized.

We could interpret it like this. The Fed is looking at both growth and inflation. When you look at inflation, you have to tighten, and when you look at growth, you have to relax. So you can't tighten while easing. It's kind of like raising interest rates and lowering them. By the way, raising interest rates can sometimes be possible. It can be possible to lower short-term interest rates while raising long-term interest rates. Base rates directly affect short-term interest rates. Quantitative tightening, on the other hand, acts as upward pressure on long-term interest rates as selling long-term government bonds. Lowering the base rate lowers short-term interest rates, but if you continue quantitative tightening, long-term interest rates go up. So while short-term interest rates go down, long-term interest rates go up. In difficult terms, you can interpret the widening of the short- and long-term interest rate gap.

I've heard of short- and long-term interest rate reversals. You've never heard of a short- and long-term interest rate reversal? It's normal to expand. The reversal itself is abnormal. Banks often raise short-term funds and lend long-term loans. Because short-term interest rates are generally lower than long-term interest rates, you can get a loan-to-deposit margin by drawing funds from low short-term interest rates and lending at high long-term interest rates. By the way, if short- and long-term interest rates are reversed, they will be pulled out at high short-term interest rates. As I mentioned before, if you lend at low-term interest rates, the bank's profitability will drop significantly. So after a certain period of time since the short- and long-term interest rate reversal, the insolvency of small and medium-sized banks in the United States has increased, such as the SVB crisis like March this year.

But what happens if you lower the interest rate by lowering the benchmark interest rate and increase the interest rate by quantitative tightening? Yes, the gap between the interest rates in the short and long term increases the margins in the banks.