Powell: "Not the time to discuss tapering"... Market reassured by maintaining 'zero interest rate' (Comprehensive)

Zero Interest Rate Maintained Until 2023 Confirmed
Market Responds with Rally Easing Rate Hike Concerns

[Asia Economy New York=Correspondents Baek Jong-min, Hwang Jun-ho, Kim Su-hwan] Federal Reserve (Fed) Chair Jerome Powell succeeded in calming the market, which had been concerned about inflation due to an early economic recovery. The dot plot of the Federal Open Market Committee (FOMC) members, which the market was closely watching, reaffirmed that there will be no interest rate hikes until 2023. The market cheered the Fed's policy and rallied.

◆Powell: "Inflation is temporary"=At the press conference announcing the results of the FOMC meeting on the 17th (local time), Chair Powell did not read a statement as usual. He first reflected on the Fed's aggressive response over the past year since the COVID-19 outbreak. Powell then repeatedly emphasized that even if the economy recovers quickly, long-term uncertainties remain significant, so interest rate hikes should be restrained and early tapering (reduction of asset purchases) is not possible.

The Fed projected inflation to reach 2.4% this year. However, Powell stressed that this is a temporary change due to the base effect from last year's contraction and that policy cannot be changed for this reason. He reiterated, "The economic outlook is very uncertain for the next 2 to 3 years." He argued that although vaccinations and government stimulus measures have boosted the economy, the path remains unclear.

When asked if it was time to discuss tapering, he firmly said, "Not yet," adding, "If discussions begin, we will inform the market as soon as possible."

◆Dot plot unchanged on rate direction=Powell cautioned against overinterpreting the dot plot released that day, where some FOMC members advanced the timing of rate hikes to 2023. In this dot plot, seven members expected rate hikes in 2022, two more than before. He said, "The dot plot is simply a compilation of individual members' opinions," emphasizing, "The important point is that the vast majority of the committee sees no rate hikes until 2023."

Major investment banks agreed that the Fed's stance was 'dovish.' Goldman Sachs raised its inflation forecast but noted that only seven members expected rate hikes in 2022, which is somewhat dovish, and predicted rate hikes in 2024. Morgan Stanley also judged that the dot plot was insufficient to signal a change in rate direction.

Powell spoke in detail about the rise in Treasury yields. Regarding the rise in U.S. Treasury yields due to inflation concerns, he said, "It is a disorderly market phenomenon. The current monetary policy is appropriate. There is no reason to retreat because of rising Treasury yields." However, he explained, "Maintaining financial stability is absolutely essential, and we will monitor it closely."

Powell acknowledged that some asset valuations have risen but dismissed the possibility of an asset bubble. He analyzed, "We maintained zero interest rates for seven years, but debt levels did not increase significantly," and added, "Our financial market, with strengthened supervision and regulation, appears to be holding up well."

◆Stock market initially relieved... Won-Dollar exchange rate falls=With the Fed's easing stance reaffirmed, U.S. Treasury yields stabilized and U.S. stocks rose. On this day in the New York stock market, the Dow Jones Industrial Average closed above 33,000 for the first time ever, and the Nasdaq index ended higher after a 1.5% decline earlier. German automaker Volkswagen's American Depositary Receipts (ADR) surged by 30%.

The dollar weakened. The Korean market also felt relieved by the FOMC results. In the Seoul foreign exchange market on the morning of the 18th, the won-dollar exchange rate opened at 1,122.5 won, down 7.7 won from the previous trading day. At 10:20 a.m. on the 18th, the KOSPI was at 3,076.18, up 0.95% (28.68 points) from the previous day. The KOSPI opened at 3,054.93, up 0.24% (7.43 points) from the previous day, and maintained its upward trend. Regarding investor trends, institutions and foreigners bought stocks worth 424.8 billion won and 44.3 billion won respectively, while individuals sold stocks worth 451.6 billion won alone.

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