Experts Say "This Summer Will Allow Judgment on US Inflation and Tightening Direction"

"Tapering Discussions Deepen in July-August"

Possibility of Powell's Remarks at US Congress and Jackson Hole Meeting

Inflation Indicators Rising Sharply, Fueling Early Tightening Speculation

If US Inflation Rate Remains in the 3% Range for Several Months, It Constitutes Inflation

Excessive Interpretation of Early Tightening Should Be Avoided

Real Economy, Including Employment, Still Faces Difficulties

[Asia Economy, Reporter Kim Eunbyeol] Market experts evaluated the mention of tapering (asset purchase reduction) possibility at last month's US Federal Reserve (Fed) Federal Open Market Committee (FOMC) regular meeting as earlier than expected. They took a cautious stance on whether the recent rise in inflation is a natural occurrence during economic recovery or an accelerated inflation that fuels currency depreciation. Since the economy has been gradually recovering from the COVID-19 shock since the third quarter of last year, it is expected that the analysis of inflation will become clearer around July-August when last year's base effects disappear.

"Tapering Discussions Deepen in July-August"

Kim Sung-taek, Head of Global Economy at the Center for International Finance, said in a phone interview with Asia Economy on the 21st, "I thought tapering mentions would start in June, but it was earlier than expected," adding, "I believe they have at least floated an 'ad balloon' regarding tightening." He predicted that after tapering discussions in July-August, plans would be announced in December, with tightening beginning early next year. July is also a time when the direction of inflation can be gauged as the June consumer price index (CPI) will be released.

There is also speculation that tapering plans may be presented at the upcoming August Jackson Hole meeting. Since Fed Chair Jerome Powell explained the adoption of the Average Inflation Targeting (AIT) at last year's meeting, it could serve as an opportunity for policy adjustment. Oxford Economics forecasted, "The Fed will officially announce tapering plans at the August Jackson Hole meeting and begin tapering in early 2022." Analyst Park Sung-woo of DB Financial Investment said, "From around July-August, Powell will speak at the US Congress House and Senate, and there is also the Jackson Hole meeting, so tapering decisions can be judged then," adding, "Actual tapering is likely possible early next year."

Inflation Indicators Rose... But Real Economy Shock Persists

The reason early tightening speculation continues in the market is that inflation indicators have exceeded central banks' targets (2%). Last month, the US Consumer Price Index (CPI) rose 4.2% year-on-year, significantly surpassing expectations. The core CPI increased 3% year-on-year, and the Personal Consumption Expenditures (PCE) price index, which the Fed references, was 2.3% in March. Professor Ahn Dong-hyun of Seoul National University's Department of Economics said, "US Treasury Secretary Janet Yellen tested the market by initiating tightening, but the trend did not turn downward," adding, "Yellen created space for Chair Powell, and since then, there has been a gradual move toward tightening." He further noted, "If the US inflation rate remains above 3% for the next two to three months, early tapering is possible."

U.S. Federal Reserve (Fed)
Photo by Reuters Yonhap News

However, there are also views that inflation momentum is unlikely to continue steadily and that tightening is premature given the still difficult real economy conditions such as employment. Fed Vice Chair Richard Clarida said, "There is a deep hole in the labor market," and that the economy has not yet recovered enough to mention tapering.

The situation is similar in South Korea. Although South Korea's CPI inflation rate was 2.3% last month and economic growth is expected to reach 4%, households have not escaped the impact of COVID-19. According to the 'First Quarter Household Income and Expenditure Survey' released by Statistics Korea the day before, earned income (2,778,000 KRW) decreased by 1.3% compared to the same period last year.

Researcher Gong Dong-rak of Daishin Securities said, "The FOMC minutes' wording is indeed a long-term strategic move to initiate an exit strategy, but it is more of a cautious expression raising issues," adding, "It is inappropriate to interpret this as an expansion toward early tightening." He forecasted, "The Fed's first interest rate hike is expected in the second half of 2022, and the start of tapering is expected in the second quarter of next year."

Researcher Oh Chang-seop of Hyundai Motor Securities explained, "The market's stable response to the FOMC minutes' news is because the minutes were interpreted at a fundamental level," adding, "Looking closely, tapering discussions are premised on US economic improvement exceeding the Fed's targets, but currently, the economy is still below targets and inflation is considered temporary." He analyzed that accommodative monetary policy will continue to support employment recovery for the time being. Furthermore, Oh emphasized, "Even if tapering accelerates, it will likely be around the end of this year, and if employment recovers rapidly and the economy returns to a normal track after this winter, US interest rate hikes will also likely be possible only in the second half of next year."

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