"How Long Will the US Maintain Its Low Interest Rate Policy?"

Jerome Powell, Chairman of the Federal Reserve (Fed) [Source=Reuters Yonhap News]

[Asia Economy Reporter Junho Hwang] With the Korean stock market closed due to the Lunar New Year holiday, investors' attention is turning to the United States. In particular, the focus is on the link between US inflation, interest rate hikes, and stock price adjustments. Amid this, Jerome Powell, Chair of the Federal Reserve, the US central bank, reaffirmed the low interest rate policy on the 10th (local time). He also dismissed the possibility of sudden inflation due to vaccine distribution and economic recovery. The securities industry expects the low interest rate policy to continue until around the fourth quarter of this year in the long term.

Chair Powell Maintains Low Interest Rates

On the 10th (local time), when the Lunar New Year holiday began in Korea, Jerome Powell, Chair of the Federal Reserve, announced that low interest rates would be maintained. During an online seminar of the New York Economic Club that day, he emphasized that "the labor market is still in a state of shock" and that "a patient and accommodative monetary policy must be pursued for the economy to recover enough for low-wage workers to find jobs." Regarding this statement, the US economic media outlet The Wall Street Journal interpreted it as a clear indication that the Fed will not raise interest rates or begin tapering (reducing bond purchases) for the time being.

Chair Powell stated that active fiscal policy by the government is necessary for economic recovery, as monetary policy alone is insufficient. He also ruled out the possibility of inflation. He diagnosed, "Do not expect rapid or long-term inflation," and said, "Wages and employment are recovering without inflation." In particular, he explained, "In the past, the Fed responded to falling unemployment rates by raising interest rates, but now it cannot do so."

However, the US Consumer Price Index (CPI) released on the same day for January rose by 0.3% compared to the previous month. This figure met market expectations and showed an increase for three consecutive months since November last year. The rise in gasoline and gas prices due to higher international oil prices influenced this. The core CPI, which excludes volatile energy and food prices, showed no change compared to the previous month. Indices for clothing, Medicare, housing, and auto insurance rose, while those for leisure, used cars, and airfares fell. The core CPI is one of the important inflation indicators the Fed considers when deciding monetary policy.

Fed Unlikely to Change Policy Stance for the Time Being

Sanghyun Park, a researcher at Hi Investment & Securities, expects that although expectations for economic recovery have increased, the Fed's policy stance will remain steady. Recently, Fed presidents have maintained optimistic views on the US economy this year while sharing a common view of not worrying about expanding inflationary pressures. They also emphasize that asset purchase policies will continue for a considerable period despite strong economic recovery. According to him, this suggests that the current monetary policy stance will be maintained.

Seungjin Park, a researcher in overseas bonds at Hana Financial Investment, also believes that a sudden policy shift is unlikely. He said, "If the speed of inflation is not fast, the possibility that interest rate hikes will cause increased volatility across financial markets, as seen at the beginning of the year, is low." The Fed is expected to start gradual policy changes with delayed communication with the market only when it becomes confident that the economy can normalize through fiscal policy and vaccine inoculation. This is likely to be a period when inflation caused by demand factors, in addition to supply-side factors, is confirmed and uncertainties about economic activities are alleviated through vaccination. Currently, due to issues such as variant emergence and vaccine supply, herd immunity in the US is expected to be achieved around this fall, and his forecast is that the Fed's official recognition of inflation and policy changes will come later, around the fourth quarter of this year.

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