[New York Diary] "High Interest Rates Drive Boom"... Wall Street Debates the Mystery of the U.S. Economy

"If U.S. interest rates fall below a certain level, the economy will actually slow down."

This is the claim of David Einhorn, chairman of Greenlight Capital, known as the 'legend of hedge funds.' Recently, a contrary view has emerged in some corners of Wall Street against the conventional monetary and economic policy wisdom that the Federal Reserve's (Fed) high interest rates are driving economic growth. As the benchmark interest rate rose from the 0% range to 5.25-5.5%, interest income from bond investments and deposits increased, boosting disposable income for Americans, which in turn led to expanded consumption and a boom. Einhorn estimated that U.S. households are generating annual earnings of up to $400 billion from $13 trillion in assets that earn short-term interest. He challenged the orthodox monetary policy concept that tightening slows the economy and easing stimulates it.

[Image source=Yonhap News]

Despite the recent accumulation of high-intensity tightening, the resilient U.S. economy and last week's indication by Fed Chair Jerome Powell of a delay in rate cuts have sparked new debates in markets that had completely dismissed such claims. While the prevailing view is that this opinion is absurd, some are beginning to pay attention to these unorthodox views that contradict conventional wisdom. The U.S. economy is so strong that even the Fed chair finds it difficult to predict. At a forum held last week in Washington D.C., Powell said, "It may take a long time to gain confidence that inflation is making progress toward our goal." He added, "Recent data have not given us confidence that inflation is improving," and said rates could be kept "as long as necessary" if price pressures persist. This is a reversal from his statement in early March that "the time for rate cuts is not far off." Now, statements suggesting the possibility of rate hikes have even started to come from Fed officials such as John Williams, president of the New York Federal Reserve Bank.

Regardless of the correlation between interest rates and the economy, it seems clear that the damage high interest rates cause to the economy is less than in the past. This is also confirmed by numbers. The Fed raised rates from the 0% range in 2022 to 5.25-5.5%, the highest level in 23 years. Normally, raising rates should reduce investment and consumption and contract the economy, but the current situation is quite the opposite. The recession most economists predicted last year did not occur, and the economy improved. When the Fed began raising rates, the average GDP growth rate for the previous two quarters was 2.5%, but now it is 4.2%. The unemployment rate remains unchanged at 3.8%, and corporate profits increased from $3 trillion to $3.4 trillion. The S&P 500 index jumped from around 4,300 to about 5,000.

The market is filled with questions about the background of the U.S. economic boom and various analyses about its causes. Einhorn’s radical claim that high interest rates stimulate economic growth is just one of many analyses. Most suggest that increased immigration led to higher production and consumption, and expanded government fiscal spending boosted the economy. There is also speculation that the potential growth rate itself has risen, pushing up the neutral interest rate. Some warn that rising delinquency rates on credit cards and auto loans indicate the U.S. economic boom may be temporary.

With the whole world watching only for a U.S. rate cut, the U.S. economy enjoying a 'mystery'-like boom that defies economists’ predictions raises concerns. South Korea, which has kept rates unchanged for 10 consecutive times since January last year, faces a high risk of a slowdown in economic recovery if the timing of U.S. rate cuts is delayed. The strong dollar (King Dollar) causing import price increases and concerns about foreign capital outflows are significant burdens on the Korean economy. The strong U.S. economy and monetary policy uncertainty, which even the U.S. central bank failed to predict, make it difficult to foresee the domestic economic situation. It is time for the Korean economy, facing the turbulence of high interest rates and high exchange rates, to fasten its seatbelt tightly.