80% Probability of US Interest Rate Hike in September... Dr. Gwak Su-jong on AI Industry Financing Variables

An analysis has emerged that the market weight is shifting toward an interest rate hike ahead of the United States Federal Reserve's September interest rate decision. Dr. Gwak Su-jong of the YouTube channel 'Economics Master Gwak Su-jong' pointed out that while there were many cases of freezing or cutting rates in the past, now 80% of people are saying it will go in the opposite direction toward a rate hike. In the video description, it was also introduced that news is emerging that the possibility of an interest rate hike currently approaches 90%.

August Consumer Price Index 3.4%... Core Inflation Trending Upward

According to Dr. Gwak, the United States Consumer Price Index announced on September 11 stood at 3.4%, remaining at the originally forecasted figure. Compared to the previous month, it rose by 0.3%, which was 0.1 percentage point higher than the initial expectation of 0.2%; he noted that while this may not seem extraordinary, attention should be paid to the fact that core consumer prices have turned toward an upward direction. His explanation is that because the United States pursues service-oriented economic growth, one must look at service consumer prices.

Dr. Gwak explained that if you exclude the general consumer price, known as the headline, and look at the core consumer price, the inflation rate jumped by 0.3 percentage points from 0.2% to 0.5%. On the other hand, he reported that core goods consumer prices dropped from 4.2% to 3.4%.

Following the inflation announcement, reactions from major investment banks, institutions, and experts were divided. Dr. Gwak first introduced the view that hawkish reactions will prevail because inflation is not falling and there is a high possibility that the war in Iran will continue, stating that the probability of an interest rate hike has reached 80% according to the probabilities from CME FedWatch. Among the media, he introduced that The Wall Street Journal has turned toward a hawkish direction, Financial Times is discussing the independence and credibility of the Federal Reserve, and The New York Times is discussing the shock to the AI industry.

The Basis for the Rate Freeze Argument is the AI Industry's Capital Demand

The basis for the rate freeze argument, which has now become a minority view, is the artificial intelligence (AI) industry. Dr. Gwak introduced the view that even if one acknowledges that prices are rising, if interest rates are raised by looking only at inflation while ignoring other policy factors, the future path of the AI industry—which requires a lot of money and can pull the United States economic growth rate up by about 0.5 percentage points—will become considerably difficult. He explained that the AI industry is in a situation where it lacks financing capabilities and must even pull in money from Europe, and this lack of funds is one of the Achilles' heels facing the AI industry.

He stated that there are voices saying it is right to leave interest rates as they are or to cut them, because if interest rates are raised while AI companies are in a situation with high capital demand, such as needing to conduct IPOs, the AI industry could immediately plummet. Dr. Gwak also revealed that his personal view is that interest rates should not be raised if the goal is to achieve a soft landing for the economy.

The 'Do Not Fight the Market' Principle... Higher Possibility of a Hike Considering Federal Reserve Independence

Nevertheless, Dr. Gwak placed more weight on an interest rate hike. Citing 'Do Not Fight the Market' as the number one basic principle of economic analysis, he said that if more than 80% of the market majority says interest rates will rise, then that is correct. As the second basic principle, he presented that policies should be honest and transparent to minimize market uncertainty.

He also pointed out the issue of the Federal Reserve's independence and credibility. Dr. Gwak noted that if the Federal Reserve decides to lower or raise interest rates by calculating how much money the AI industry earns and how much interest expense is spent, it would mean it becomes a bank for corporations rather than a bank for the nation. His view is that there is a high possibility of moving toward an interest rate hike, as it would inevitably suffer a major blow to its independence and credibility. He also reported that Kevin Warsh, the Federal Reserve official, strongly suggested at the August Jackson Hole Economic Policy Symposium that inflation is unacceptable.

However, the aftermath of raising interest rates remains a task. Dr. Gwak said that since Wall Street has already undergone significant adjustment in the second week of September, the question arises as to whether the market will be okay even if the Federal Reserve raises interest rates, using the metaphor that once you take a punch, the shock lasts a long time. He also predicted that while the conditions for raising interest rates to pull in funds are met in a situation where money is very scarce, doing so will inevitably cause ROI (Return on Investment) to be heavily damaged, which will also give the Federal Reserve a headache.