Eyes on the 'FOMC' Amid Inflation Surprise

Building housing the Federal Reserve, the monetary policy decision-making body located in Washington, USA (Asia Economy DB)

[Asia Economy Reporter Junho Hwang] With the U.S. Consumer Price Index (CPI) for May surprising the market, attention has turned to the Federal Open Market Committee (FOMC) meeting, where the U.S. central bank, the Federal Reserve (Fed), will decide the direction of monetary policy. Market participants are watching closely to see how the Fed interprets the inflation data and to what extent tapering discussions will proceed.

On the 12th, Samsung Securities maintained its previous outlook in its Week Ahead report, stating that tapering is more likely to be signaled during the August Jackson Hole speech rather than at this month's FOMC meeting. This is because, unlike in April, although the CPI was revised upward again in May, interest rates fell, the dollar weakened, and the stock market rose. In April, the sudden inflation surge led to expectations of tightening, causing interest rates to soar.

The U.S. CPI for May, released on the 10th (local time), rose 0.6% month-over-month (April 0.8%, forecast 0.5%) and 5.0% year-over-year (April 4.2%, forecast 4.7%). Core consumer prices increased by 0.7% month-over-month (April 0.9%, forecast 0.5%) and 3.8% year-over-year (April 3.0%, forecast 3.5%). The core CPI showed the highest increase in 29 years, while the overall CPI recorded its largest rise in 13 years.

Samsung Securities interpreted the market reaction as participants beginning to accept the Fed's view of 'transitory inflation.' Looking closely at the sharp rise in May prices, only certain items stand out. Housing costs, which account for 33% of the CPI, and medical expenses, which make up 20% of the PCE, have actually remained stable with year-over-year increases of 2.2% and 1.5%, respectively. The core CPI has risen at an average annual rate of 2.5% over the past two years, just returning to the pre-COVID trend. In fact, the medium- to long-term expected inflation (BEI) reflected in the U.S. Treasury market has continued to decline since the April CPI release last month.

Accordingly, Samsung Securities expects that the FOMC will reaffirm that it is not yet time to start tapering discussions, which have drawn the most market attention. It appears that any indication of tapering will likely come during the Jackson Hole speech, after confirming an increase in new employment and stabilization of inflation month-over-month.

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