Soaring Expectations for US Economic Recovery... Will 'Inflation' Become a Variable?

Inflation Rises Rapidly on Economic Recovery Hopes from Biden Stimulus
30-Year Treasury Yield Surpasses 2%... Fed Draws Line on Stimulus Withdrawal

[Asia Economy Reporter Park Byung-hee] U.S. President Joe Biden's large-scale economic stimulus package is fueling expectations for economic recovery and rapidly driving up inflation. Various indicators such as stocks, bonds, and oil prices are pointing to inflation. The U.S. Federal Reserve (Fed) acknowledges inflationary pressures but draws a line on withdrawing stimulus measures.

The U.S. bond market has recently been highly sensitive to inflation expectations. On the 8th (current time), The Wall Street Journal (WSJ) reported that the yield on the 30-year U.S. Treasury bond surpassed 2% intraday for the first time since the COVID-19 pandemic. WSJ explained that the rise in Treasury yields reflects expectations that the Biden administration's large-scale stimulus will significantly boost U.S. economic growth.

Michael Contopoulos, Director at Richard Bernstein Advisors, said, "When the 30-year yield exceeds 2%, inflation begins to rise," adding, "This is a clear leading indicator of economic growth."

The yield spread between long-term and short-term Treasury bonds is also widening. This is interpreted as a signal reflecting expectations for economic growth and inflation. The spread between the 30-year and 5-year U.S. Treasury yields reached 1.47 percentage points, the highest since October 2015, and the spread between the 10-year and 2-year yields widened to the largest gap since early 2017. The previous day, Bloomberg reported that the breakeven inflation rate (BEI), calculated by subtracting the yield on 10-year Treasury Inflation-Protected Securities (TIPS) from the 10-year Treasury yield, rose to 2.21%, the highest since 2014.

Stock prices and oil prices have risen for six consecutive trading days. The New York stock market's Standard & Poor's (S&P) index closed at 3,915.77, up 0.74% from the previous trading day, moving closer to the 4,000 mark. The S&P 500 index rising for six consecutive trading days is the first occurrence since August last year. The price of West Texas Intermediate crude oil futures on the New York Mercantile Exchange (NYMEX) closed at $59.97, up 1.97% from the previous trading day. Brent crude futures on the London ICE Futures Exchange surpassed $60, closing at $60.56 after a sharp 2.1% increase. Some forecasts suggest that international oil prices could rise to $80 per barrel this year.

While rising inflation reflects expectations for economic recovery, it could also pose a risk to the economy, prompting the market to watch closely. If inflation risks increase, the Fed may withdraw stimulus measures sooner than expected, potentially impacting asset markets such as stocks. Conscious of market concerns about the so-called 'taper tantrum,' Fed officials have recently emphasized the necessity of stimulus policies.

Richmond Fed President Tom Barkin said on the day, "I expect inflation to show volatility in the short term," but stressed, "We need to focus on the medium-term inflation trend." He added, "There is as much risk of deflation as there is of inflation," and said, "Many people have lost jobs, and I will support ways to help them."

Amid growing market attention to inflation, the U.S. Department of Commerce is scheduled to release the January Consumer Price Index (CPI) inflation rate on the 10th.

Meanwhile, the U.S. Congressional Budget Office (CBO) also warned of potential backlash from Biden's large-scale stimulus package, criticizing the president's minimum wage increase plan. In a report, the CBO estimated that raising the hourly minimum wage from the current $7.25 (about 8,100 won) to $15 (about 16,700 won) by 2025 could lift 900,000 people out of poverty but result in about 1.4 million job losses. Since Republicans strongly oppose the minimum wage increase, it is reported that President Biden plans to pass the stimulus package excluding the minimum wage hike for the time being.

This content was produced with the assistance of AI translation services.