Fed Signals Hawkish Shift... Raises Inflation and Growth Forecasts

Monetary Policy Normalization Schedule Likely to Be Moved Up
Government Bond Yields Rise and Dollar Strengthens... Gold Prices Fall

[Asia Economy New York=Correspondent Baek Jong-min] The U.S. Federal Reserve (Fed) has signaled a shift from dovish to hawkish. With the COVID-19 crisis receding due to vaccine rollouts and the economy returning to normalcy, a change in monetary policy is deemed inevitable. Fed Chair Jerome Powell emphasized that the dot plot reflects individual opinions of Fed members and sought to ease concerns about early rate hikes and tapering of asset purchases, but analysts say the trigger has already been pulled.

◇ Majority of Fed officials expect "two rate hikes in 2023" = According to the dot plot released after the two-day Federal Open Market Committee (FOMC) meeting on the 16th (local time), 13 out of 18 FOMC members anticipated rate hikes in 2023. Eleven members predicted two rate hikes in 2023. Seven officials also expressed the possibility of rate hikes in 2022. Only five members projected that the current zero interest rate would be maintained through the end of 2023.

In the dot plot released at the March FOMC meeting, four members indicated possible rate hikes in 2022, and seven members in 2023. Considering this, Fed officials have significantly advanced the expected timing of rate hikes.

Although the dot plot is not an official Fed forecast, it is the most important factor in predicting future rates as it reflects the views of Fed officials. The market had expected the Fed to hold rates steady again, and the dot plot has been viewed as a "weather vane" to gauge the future direction of rates, drawing attention.

The Fed’s projection on this day of U.S. inflation at 3.4% and economic growth at 7% for this year is also interpreted as signaling that monetary policy normalization will occur faster than previously expected.

The market views this as a shift from the Fed, which had emphasized patience regarding rate hikes.

Michelle Meyer, U.S. economist at Bank of America, evaluated that "the Fed has removed the negative factors caused by COVID-19." Investment bank JP Morgan reported that the Fed is focusing more on the reduced risks due to vaccine distribution than on inflation. Although inflation forecasts were revised upward, the Fed emphasized the transitory nature of inflation through its statement and Powell’s remarks.

Chairman Powell pointed out, "Inflation is higher and more persistent than we expected," but also predicted, "Inflation will now subside." Powell reaffirmed the Fed’s stance that it will use its tools whenever inflation surges.

◇ Dollar strengthens... gold price plunges 2% = Powell cautiously mentioned in the press conference that tapering was discussed at this meeting. He explained, "Regarding tapering, we need to confirm substantial progress toward employment and inflation goals, and the bar for rate hikes is higher." Powell promised to provide sufficient signals to the market before tapering, seemingly mindful of a tightening shock. Investment bank UBS expects stronger tapering signals at the August Jackson Hole meeting or the September FOMC.

The New York stock market reacted sensitively to the Fed’s shift but did not crash. The U.S. Treasury yield, which had been stabilizing recently, surged to 1.59%. The rise in bond yields caused gold prices to fall 2%, while the dollar value rose about 1%. On the New York Stock Exchange, the Dow Jones Industrial Average fell 0.7%, and the Nasdaq Composite dropped 0.2%. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as the fear gauge, rose 6% but remained at a low level compared to the beginning of the year.

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