The situation in the Middle East seems to be on

The situation in the Middle East seems to be on the rise. As the media reported, if Iran was behind Hamas, the story would be very complicated. I also think that political instability in the Middle East could last longer than expected. I think that if the conflict in the Middle East, which ended in a short period of time, continues for a long time like the Iran-Iraq war in the past and the Russia-Ukraine war that has continued so far, then the global economy should pass through a very difficult tunnel.

As I've told you in my previous essay, unexpected events can also affect unexpected assets. August 21... With global inflation slowing to some extent, it was seen as temporary inflation, as the Fed mentioned... And then I met Hurricane Ida. At least to the refineries, it shocked more than Hurricane Katrina in September 2005, causing oil prices to surge again, and inflation to start to rise again. Hurricane Ida didn't make everything, but I think it played some role as a connector, and most of all, it was an event of a surge in oil prices that erupted when there was a lot of anxiety about inflation.

There are a lot of people who are worried about the surge in oil prices while watching the Israel-Hamas war. If this causes high oil prices to continue for a long time, it will never be a favorable story in a situation where inflationary anxiety is growing as it is now. Anyway, I hope it will end up as a tragedy so far and not lead to further tragedy or political instability.

Of course, it raised anxiety about soaring oil prices, but the financial market as a whole does not seem to be thinking much about the current war. The preference for safe assets due to war pushed down government bond rates, which caused a warm breeze to the asset market… There's a saying that when the preference for safe assets becomes stronger, the asset market is often hit hard even if interest rates are pressed. I don't know how much the war has affected the 10-year long-term interest rate, but I think we need to find a reason somewhere else. And the reason seems to have come from our back-and-forth Fed as well.

The dollar's exchange rate approached 150 yen and the rate of increase in Japan's 10-year interest rate also accelerated to 0.8%. As the dollar strengthened, the U.S. 10-year interest rate continued to strengthen above 4.8%, and the Fed seemed to be somewhat embarrassed. Then, while burning the will to tighten something, it should send a slightly more flexible message about interest rate hikes. Last year, he said he would continue to tighten, but he would adjust the pace, and how fast... How high... How long... And that's a three-tiered separation that's what's limiting the strength of the dollar, which soared into the sky from October to November of last year. We have to find something similar again this time.

Fed members seem to be trying to find the answer, this time, to the cause of the long-term rise in interest rates. And one of the doves, Mary Daly, president of the Federal Reserve Bank of San Francisco, comes forward. I was saying that a rise in long-term interest rates would be equivalent to a one-time Fed rate hike. At the September FOMC, there were many people who saw one additional rate hike within this year… With long-term interest rates up quite a bit since September's FOMC, Daly's comments suggest that the Fed's rate hike is now over.

And then you take over the Barton and you have Lori Logan, the president of the Federal Reserve of Dallas, who handled the repo crisis in 2019 while serving as desk director at the Federal Reserve of New York. You know the impact of Fed rate hikes or quantitative tightening on the market better than anyone else. And yet it was a hawkish position to keep raising interest rates. This time, the stance changes a little bit. Let me quote.

"If long-term interest rates remain high due to term premiums, there is less need to raise the federal funds rate," Logan said. These comments add to the argument that the recent rise in bond rates could have a de facto tightening effect. Earlier, San Francisco Fed Governor Mary Daly also argued that the bond market's tightening is equivalent to one rate hike."

However, Governor Logan argued that if bond rates remain high based on faith in the strong U.S. economy, they need to raise the federal funds rate. "If the reason for the long-term rise in interest rates is based on the strength of the economy, the Fed may have to do more," he said. "After all, they argue that the Fed's policy decisions will also change depending on why long-term bond rates are soaring." (Yonhap Infomax, 23.10.10)

The 10-year long-term interest rate consists of a real neutral rate + expected inflation + term premium. (This explanation is detailed in the previous essay, so please refer to it.) Governor Logan said, "If the term premium goes up... If that's how long-term interest rates go up, I'm saying that maybe we don't need further tightening by the Fed, which is in line with Governor Mary Daly, but ... I'm going to say something slightly different in paragraph two, if... Unless long-term interest rates rise as term premiums rise... If the U.S. economy is so strong that interest rates have gone up, I'm saying we need to raise it further.

The U.S. economy is too strong. It's stronger than it used to be. So it can withstand higher interest rates and prices as much as it wants. So the current base rate isn't high either. This means that the neutral rate has gone up, not the term premium. So that means we can raise the interest rate even more. I'm not saying yes, I'll raise the interest rate unconditionally. I'm not saying... This time, we break down interest rates into three... In other words, you break it down into neutral interest rates, expected inflation, and term premiums, and then you're talking about it one by one. It's like how fast, how high, how long... It's like breaking it down into-- it's giving the pigeon room. It's a kind of market calming.

First of all, the market was impressed by one of the hawks, Logan's comment, and the bond market started to take a breather, and as soon as long-term interest rates stabilized, Buy the Dip's algorithm burst out. I think it's almost a unconditional reflection.

So I'm going to talk a little bit about term premiums here. Why do term premiums go up? I do term deposits. Which deposit should be higher, the one-year deposit rate or the 10-year deposit rate? Obviously, it's a 10-year deposit. The main reason is that, over the course of a decade, interest rates could go up even higher and prices could be unstable. So ... that anxiety is reflected ... If you borrow and receive money for a longer period of time, you have to apply a higher interest rate. After the financial crisis, the Fed's long-term push is going to go up a little bit, and it's going to go down quickly… Because I have such conviction... The term premium was very low because interest rates would come down anyway and wouldn't rise significantly. There were also pictures of long-term interest rates being lower than short-term interest rates. However, the story has changed because the Fed's will is stronger than expected. That's what the market read. Really... No way... The atmosphere of Higher for Longer?? created anxiety about the future, which led to a rise in term premiums, which touched the rise in long-term interest rates. Yes, because the Fed's commitment to Higher for Longer was strong.. That's why the market started to follow.

By the way, what would the market look at when Lori Logan said that the Fed might stop now? If there's no uncertainty about the future, it would lower the term premium. Then long-term interest rates would come down… Wouldn't the Fed's tightening effect of rising term premiums be eliminated? Yes. Everything is relative. It's a response to what the Fed does...

I quote Kashikari, who plays the king of hawks within the Fed, saying, "Don't write a novel..." Read it carefully, and I will continue with tomorrow's essay.

"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)

I need to keep my expectations on Higher for Longer... This means that the current period premium will remain. Today's essay is reduced here. Thank you.