Growing Voices for Tapering... Will Tightening Discussions Begin?

Norway Signals Year-End Rate Hike... Canada Decides to Reduce Asset Purchases
Fed Warns "Some Asset Bubbles Exist"... Yellen Says "Rate Hike Needed"
Market Watches Closely Amid Growing Calls for Tightening Shift
Some Say Tapering Is Premature... Fitch Says "No Tightening This Year"

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Kim Suhwan] "The U.S. Federal Reserve (Fed) should soon begin discussions on tapering (reducing asset purchases)."

Robert Kaplan, President of the Federal Reserve Bank of Dallas, stated this on the 6th (local time) during a lecture at Bard College in the United States, arguing that "imbalances and bubble issues are emerging in the capital markets." This follows his remarks on the 30th at a meeting held at the Montgomery County Chamber of Commerce in Texas, where he said it was "time to discuss tapering," reiterating the need for the Fed to shift to a tightening policy. As the U.S. economy recovers faster, there is speculation that the timing for reaching the Fed's tapering conditions could be earlier than previously expected.

President Robert Kaplan of the Federal Reserve Bank of Dallas [Photo by Reuters]

On the same day, Andy Haldane, Chief Economist of the Bank of England (BOE), who voiced a minority opinion in favor of tapering at the Monetary Policy Committee (MPC), expressed a similar stance. Facing retirement from the MPC in June, he was the only member to vote for reducing bond purchases at the meeting, arguing that the scheduled end of the bond purchase program at the end of this year should be moved up to August. He emphasized the need for preemptive policy action amid growing inflation concerns, stating, "There is clear evidence that economic growth is proceeding rapidly."

Growing Voices for Tightening

The voices calling for tapering discussions are growing louder. Earlier, U.S. Treasury Secretary Janet Yellen hinted at the need for interest rate hikes on the 4th, citing concerns over overheating as the U.S. economy recovers sharply. The Fed's Financial Stability Report released on the 6th also warned that "some assets are highly valued compared to historical standards," cautioning that if bubbles spreading around certain assets burst, the financial system could be shaken.

Janet Yellen, U.S. Secretary of the Treasury
Photo by Reuters Yonhap News

The movements of major advanced countries around the world are also notable. Previously, the Bank of Canada decided to reduce asset purchases in October last year, cutting weekly government bond purchases from 5 billion Canadian dollars to 4 billion Canadian dollars. It also announced a complete halt to mortgage-backed securities (MBS) purchases. Last month, it further announced plans to reduce weekly government bond purchases by an additional 1 billion Canadian dollars. Experts interpret this as Canada already entering a tightening stance.

Last month, the Swedish central bank announced it would end its government bond purchase program as originally planned by the end of this year, and on the 6th, the Norwegian central bank announced it would raise interest rates by the end of the year. Brazil also raised its benchmark interest rate by 0.75% in March for the first time in nearly six years and raised it again by 0.75% this week.

Economic columnist Wolf Richter said, "Tapering discussions are effectively underway on all fronts." Bloomberg News also analyzed that "discussions on how long to maintain the current quantitative easing stance are actively taking place in major countries."

The expected timing for the start of tapering discussions is also accelerating. Brian Coulton, Chief Economist at the international credit rating agency Fitch Group, said, "It seems the Fed will begin serious tightening discussions starting this summer." Global financial firm ING Group also diagnosed, "The continuous positive economic indicators mean we are gradually moving toward tightening."

Fed Draws a Line Amid Tightening Trauma

Former Federal Reserve (Fed) Chairman Ben Bernanke

In 2013, then-Fed Chairman Ben Bernanke made a bombshell announcement that shook global stock markets. He announced that the quantitative easing program implemented after the 2008 financial crisis would soon be reduced.

This dealt a direct blow to global stock markets. In the month following Bernanke's remarks, the U.S. Nasdaq 100 index fell by 4%, and the MSCI Emerging Markets Index, composed of stocks representing various emerging countries, plunged 14%. This marked the beginning of the so-called taper tantrum.

The Fed is concerned that reducing the quantitative easing program could directly lead to another taper tantrum. Experts analyze that the Fed is focusing on avoiding unnecessary fear in the market to prevent a recurrence of the 2013 taper tantrum. Fed Chair Jerome Powell's emphasis that the conditions for tapering?2% inflation?will not be met this year and that it is not yet time to discuss tightening is also aimed at minimizing market shocks.

Win Tin, an analyst at Brown Brothers Harriman, said, "Chairman Powell does not want market damage caused by a shift to tightening."

Opinions That Tightening Is Premature... Market Remains Cautious

[Image source=Yonhap News]

There are still voices saying that a shift to tightening is premature. Economist Coulton, who expects tapering discussions to start from summer, said, "Because it is necessary to send preemptive signals to the market before implementing tightening policies, tightening will realistically only be possible from next year at the earliest."

Eric Rosengren, President of the Federal Reserve Bank of Boston and a Fed alternate voting member who votes in the Federal Open Market Committee (FOMC) when vacancies arise, said, "We will likely only achieve the conditions (inflation) to discuss tightening by the end of this year," which aligns with this view.

Guy Levas, an analyst at Janney Capital, said, "Tapering discussions will start at the earliest in September this year, and actual tightening will only take place in early next year." BlackRock, the world's largest asset management firm, also analyzed, "Despite the abundant liquidity currently in the market, the Fed still sees the market as stable."

As the Fed maintains a dovish stance, the market is also maintaining a wait-and-see attitude. Although weekly initial jobless claims released on the 6th fell below 500,000, lower than expected, and employment indicators improved, U.S. Treasury yields declined, interpreted as investors believing there will be no early Fed tapering.

Markets and experts agree that tightening will come eventually. However, they differ on when the actual shift to tightening will occur. Bloomberg News reported, "Investors believe the Fed cannot maintain the current quantitative easing stance forever."

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