Washington, D.C. The U.S. Federal Reserve.
With three hours left before the CPI announcement, the place was sunk in pitch-black silence.
Outside the building, reporters gathered like a swarm of bees were shouting Chairman Xenon Pavil’s name, a scene straight out of hell.
When Chairman Pavil finally arrived in the conference room, the members of the board rose to their feet as if on cue.
“Enough. Skip the formalities and start the meeting.”
The reason Chairman Pavil’s face was already stiff was because of the CPI figures to be released three hours from now.
“Vice Chair. What did it come out to?”
“I regret to say... it was tallied at 9%.”
The vice chair handed over the faxed materials that had arrived from the Department of Labor that morning. At that, Pavil and the rest of the board members looked half out of their minds.
It was a disaster. The inflation virus was more vicious than the coronavirus.
They had broken one of its legs with three Big Steps, and yet consumer prices were still running around. No, they were flying.
“How is it 9%?”
“My apologies. A surge in energy prices, supply chain disruptions, and other factors overlapped...”
“You said that last month, and the month before that! The answer I want to hear is why the price index keeps getting worse when we’ve raised rates this much!”
Chairman Pavil shouted irritably.
He had no choice but to.
Last June, when the specter of COVID was beginning to recede, the Fed had announced that inflation numbers would subside after peaking in November. They had shown confidence, saying the Fed had prepared measures for every possibility.
But the market moved in the exact opposite direction from what they had hoped.
The CPI, which raised inflation concerns even if it merely entered the 5% range, had scored a lucky seven for three consecutive months. The Fed had administered three doses of the antibiotic known as Big Steps, but far from bringing prices under control, this month it was spitting fire at 9%.
“To hell with Xenon Pavil, Lucifer’s heir!!”
“Go to the helll!!!”
Thanks to that, the American people were suffering under the double burden of interest rate hikes and soaring prices, and their discontent toward the Fed was growing by the day.
“Answer me! Why the hell is this happening?”
When Chairman Pavil’s unjustified outburst finally ended, the vice chair answered in a voice that seemed to crawl into the floor.
“With all due respect, Mr. Chairman. I believe it is time to make a decision... We must carry out a Giant Step.”
Not even the sound of breathing could be heard in the conference room.
A Giant Step meant a 0.75% increase, an ultra-high-intensity hike that had not been implemented even once since Reagan.
“No matter what, a Giant is a bit...”
“We’ve already carried out three Big Steps. If we add a Giant on top of that, our mortgages may be put at risk.”
“If the people’s mortgages become unstable, the Lehman crisis could repeat itself. I think we need to be cautious about this.”
The doves sitting on the opposite side rose in protest, but for some reason, there was no confidence in their voices.
“My thoughts are a little different. Haven’t we come all the way here because we kept being cautious, cautious, and cautious? Now we need to be cold-headed. In any case, the CPI will be announced at 9% in three hours, and criticism has already become unavoidable.”
“...”
“We must decide. Whether we bring inflation under control even now, or continue fumbling around.”
Today’s board meeting was an overwhelming victory for the hawks.
When Vice Chair Saturn spoke with emphasis, no one could raise an objection. That was how shocking a CPI of 9% was.
As the meeting reached a provisional conclusion, Chairman Pavil opened his mouth.
“Vice Chair Saturn. What is our policy rate right now?”
“2.5%.”
“Then if the rate becomes 3.25%, will these prices be brought under control?”
“It will be better than 9%. No—whatever the case, if the CPI is like that, we must prescribe a stronger rate treatment.”
All the board members’ faces were bleak. If this one Giant could settle inflation, they could grit their teeth and endure it just once. But right now, they could not guarantee that this would be the end, and that left them staring into darkness.
After a long silence, Chairman Pavil opened his mouth.
“Let’s do it.”
He picked up the documents.
“Give the signal for a rate hike during today’s interview. But we can’t let unnecessary misunderstandings flow into the market. Make it clear that even this figure was already within our calculations.”
“Understood. But if reporters ask about our course going forward...?”
“Rates may go higher, or they may go even higher... That is our answer. For the time being, don’t bring up mortgages at our board. Prices come before borrowers.”
With 30 minutes left before the CPI announcement, the Fed’s interest rate course was decided.
A Giant Step, raising the policy rate to 3.25%.
Just as everyone was heavily lifting their backsides from their seats, Pavil called Vice Chair Gray aside.
“Gray. What did you say SB’s condition is right now?”
Vice Chair Gray was the leader of the doves, and he was currently saddled with the most difficult assignment.
“...It is serious. According to our current investigation, the vast majority of their assets are long-term bonds.”
“How serious?”
“Serious enough that it would not be strange if they defaulted tomorrow... If long-term bond prices fall any further, Wall Street reporters will race to report concerns of default.”
There was a reason the doves were still hesitant about raising rates even after the CPI index had broken through 9%.
A recession.
With rates rising every time they opened their eyes, bonds had plunged into the abyss, and financial firms, insurers, and banks that had bought long-term bonds in particular were screaming every morning.
If by any chance these sparks spread in the wrong direction and led to distrust in the financial system, a disaster incomparable to Lehman would unfold.
“Damn it.”
Pavil let out a low sigh and asked.
“What if the federal government provides assistance?”
“The losses are too large for that. If we keep the SB bastards alive, the others will come running too.”
“...Then what if we let them go bankrupt?”
“We would need an aggressive response at the federal government level. Measures like guaranteeing the full amount of deposits. If that does not happen...”
He did not even want to imagine the rest.
It would be the sight of bank runs flooding the entire U.S. banking sector.
After pondering briefly, Chairman Pavil said,
“Gray, you handle today’s interview in my place. I need to go to the White House now.”
*
I was gradually starting to believe that absurd dream with certainty.
[Breaking News — U.S. Department of Labor Announces CPI at 9%!]
[No Remedy Works? U.S. Prices Still Struggling Despite Soaring Rates!]
[Double Burden of Rising Rates and Prices! Fed’s Prediction of a November Peak Misses the Mark!]
[Breaking News — Chairman Pavil Holds Emergency Briefing!]
[Pavil: “We considered the possibility low, but in fact, even this was already within the Fed’s expectations.”]
[Pavil: “Prices Over Economic Slowdown; Considering Stronger Measures.”]
The CPI figures announced on Monday threw not only Wall Street but the entire world into shock.
The Fed’s interest rate policy had been revealed as a failure, and Chairman Pavil had hinted at an even stronger injection.
The stronger injection he spoke of could only mean a Giant Step, and when reporters asked whether this would be the last one, he answered with a single word: “No.”
It meant rates could rise further.
“Team Leader Choi, what happened?!”
Thanks to that, even though it was past one in the morning, every employee on the overseas team had to stay at their desks.
At Department Head Oh’s urgent question, Team Leader Choi spoke with a troubled expression.
“It looks like they’re going to see it through to the end.”
“The end?”
“It seems to be the Fed’s will to get prices under control first, even if the economy slows. Seeing as there isn’t a single opposing statement from the White House, I think they’ve already discussed it all.”
Department Head Oh was at a loss for words.
A rate hike pace like this was practically the same as the Democratic Party handing power over to the Republicans, but it seemed the economy was so severe that they could not oppose it despite that.
“The bond market has already reacted... Everything is crashing.”
“What about SB?”
“It plunged 15% as soon as the CPI was announced. This is breaking news that just came in through the Bloomberg terminal, and they say the amount withdrawn in the past 30 minutes may reach 50 million dollars. The deposit exodus is becoming reality.”
The foreign bonds team already looked as if their souls had left their bodies, and the foreign equities team looked like death-row prisoners waiting for their turn at the guillotine.
They had no choice.
In just five months, the era of 20-year long-term bonds in the 2% range had turned into an era where the policy rate exceeded 3%... In other words, holding those long-term bonds meant taking losses for 20 years. Because of that, those long-term bonds were plunging day after day as if they had hit the lower limit, falling far below cost.
“Withdrawals are increasing?”
“Yes. At this rate, SB probably won’t be able to hold out either. They’ll have to sell bonds at a loss and secure funds for withdrawals... Losses are inevitable.”
The sin of trusting America too much...?
SB officials might feel wronged. They had bought U.S. bonds, the safest assets in the world, only for those bonds to fall into the abyss.
Over the past nearly 30 years, U.S. bond prices had risen and fallen according to interest rates, but there had never been a case like this, where they fell below cost in such a short time.
Once the situation was organized, Department Head Oh gave his orders.
“Bond team.”
“Yes.”
“We move too. If America raises rates, Europe won’t get off unscathed. Sell assets centered on long-term bonds and hold cash for the time being.”
“Understood.”
Once the bond team hurriedly disappeared, only the equities team remained.
“From here on, it’s the realm of instinct. Everyone, give me your opinions. What do you think will happen?”
From here on, it was the realm of political engineering.
There was only one reason SB’s stock price was holding up even at this point, when investment failure was obvious. The vague expectation that the Fed would put out the fire.
The logic of too big to fail did not apply only in Korea, and the bankruptcy of a bank, of all things, was no small burden on American politics either.
But the situation in the absurd dream I had seen was different.
The Fed and the White House coldly turned away from their bankruptcy, and in the end, the stock became scraps of paper.
“Director, won’t they put out the fire? No matter what, it’s a bank...”
“I think the same. The information we know must already be known on Wall Street as well. If the stock price is holding up despite that, it seems to mean there’s something only they know.”
I answered.
“They won’t put out the fire. In fact, neither the Fed nor the White House has the capacity to put it out.”
“...What does that mean?”
“The American people are already furious under the double burden of rising rates and prices. If they implement policies to help corporations in this situation, it will lead to even more unpredictable chaos in state affairs. Just like during Lehman.”
In fact, during the subprime crisis, many citizens rose up saying exactly this.
They help the rich while turning away from ordinary people?
“The fact that it only fell 15% today is the last escape chance given by heaven. We need to quickly sell off the remaining assets and return to a wait-and-see position.”
Unlike the previous meeting, today there was no one glaring at me or sniping at me. At least thanks to my stubbornness, we had sold half already.
“Any other opinions?”
Looking around the quiet conference room, Department Head Oh turned his head toward Team Leader Choi.
“Team Leader Choi. If we dispose of it now, how big is the loss?”
“Bond prices have already hit the floor, so we can’t dispose of those. If we sell what stock we have left, the loss alone will be roughly 60%.”
What a shame. If the decision had been just a few days faster, the loss could have stopped at 30% instead of 60%.
“Then let’s not take a 60% loss. Let’s take a 40% profit.”
“Then...”
But Department Head Oh was not a fool who made the same mistake twice.
“Sell all remaining shares.”