Long-term interest rates rise as Federal Reserve shifts toward market-oriented stance

While the Federal Reserve froze the benchmark interest rate, long-term rates have trended upward as the central bank moves to reduce forward guidance. Hong Chun-uk suggested buying U.S. Treasuries for a six-month to one-year horizon, noting that two planned rate hikes could bring the policy rate from 3.75% to 5.25%.

The Federal Reserve froze the benchmark interest rate as market expectations anticipated. However, market movements following this decision imply more than a simple freeze. While the benchmark rate remained stationary, long-term interest rates have shown an upward trend, presenting complex signals regarding the future direction of monetary policy.

According to a review of the FOMC by Hong Chun-uk's Economics Lecture Notes, market participants showed no significant reaction to this rate freeze. In particular, there were no major changes in futures market trading used to gauge the direction of interest rates for next year. The analysis suggests that the existing stance remains intact, with plans to raise interest rates twice—in December this year and March next year—to bring the policy rate from its current 3.75% up to 5.25%.

Federal Reserve signals reduction in 'forward guidance' to reduce market intervention

The notable aspect of this meeting is the change in how future meetings will be operated, rather than the rate decision itself. Federal Reserve Chair Kevin Oshi remarked that among the eight meetings held this year, the proportion of meetings without interest rate decisions will increase next year. This is interpreted as a will to gradually increase the number of meetings where no interest rate decisions are made.

Dr. Hong Chun-uk interpreted this movement as an intention to reduce "forward guidance," the signal the Federal Reserve provides to the market. He explained that this measure is mindful of past instances, such as in 2013, when financial markets plummeted whenever the Federal Reserve showed signs of interest rate hikes or quantitative easing tapering. The analysis suggests the Federal Reserve is shifting toward a "market-oriented" stance of not intervening excessively in the market, moving away from the method of deploying "vaccines" to prevent excessive fear in the market.

"Looking at a 6-month to 1-year horizon"... Suggestion to buy U.S. Treasuries

Regarding investment directions amidst the ongoing possibility of interest rate hikes, a specific opinion of "buying U.S. Treasuries" was presented. Rather than short-term betting, Dr. Hong recommended looking at U.S. Treasuries with a time horizon of six months to one year. He provided two reasons for this.

The first is the stability of government bonds. While the increasing volume of corporate bond issuances by AI companies could raise default risks for corporations, this could actually be a positive factor supporting demand for government bonds, which are guaranteed by the government. The second is the interest rate level. The current interest rate levels, where target yields have become sufficiently high, provide an attractive entry point for long-term investors such as pension funds.

Meanwhile, Dr. Hong emphasized the importance of adhering to asset allocation principles rather than attempting to accurately time market bottoms. He made it clear that a rebound occurring at a specific point is closer to the realm of luck than the realm of prediction. "Investors should have principles of setting target weights and performing rebalancing when those weights deviate significantly," he said, urging autonomous and courageous decision-making that does not rely on specific individuals or groups.

Source: original video (YouTube)