Fed "Discussed Tapering but No Need to Rush"

FOMC June Minutes Emphasize Patience on Monetary Policy Changes
Q2 Economic Peak Theory Spreads
US Treasury Yields Reach 1.2% Intraday
IMF Warns of Persistent Inflation Risks

[Asia Economy New York=Correspondents Baek Jong-min and Jo Yoo-jin] The minutes of the June Federal Open Market Committee (FOMC) meeting released on the 7th (local time) did not signal any interest rate hikes or early tapering (reduction of asset purchases). While the Fed reiterated its patience regarding changes in monetary policy, the theory of a second-quarter economic peak spread, causing U.S. Treasury yields to plunge to the 1.2% range during the session.

The minutes revealed that, as Fed Chair Jerome Powell mentioned, the members agreed to start discussions on tapering at upcoming meetings. Chair Powell had cautiously disclosed the initiation of tapering discussions during a press conference following the June FOMC meeting.

◇ Majority "Need Patience"... Differences Over Tapering Method = Although some members judged that conditions might arise to begin tapering sooner than expected, the majority forecasted that it was not yet time to reduce the $120 billion monthly asset purchases. Those opposing early tapering mentioned, according to the minutes, that "patience is needed in assessing progress and announcing changes to asset purchase plans." Some members also noted the need to "be well prepared for policy shifts." The minutes indicated that members still viewed the rise in inflation as temporary, which can be interpreted as a low likelihood of early rate hikes.

CNBC reported that the minutes gave no hints about the timing of tapering. The Wall Street Journal (WSJ) also highlighted that while the Fed hinted at tapering and possible rate hikes, it continued to emphasize patience.

U.S. media also focused on conflicts among members. According to WSJ, a majority argued that considering the rapid rise in real estate prices, mortgage-backed securities (MBS) purchases should be reduced first, but other participants preferred to reduce the pace of both Treasury and MBS purchases in a balanced manner. This suggests a division of opinions among members.

The recently released FOMC minutes coincide with the spreading theory of a second-quarter economic peak. The day before, the Institute for Supply Management (ISM) announced the June Services Purchasing Managers' Index (PMI) at 60.1, falling short of the market expectation of 63.3. The slowdown in the service sector, which accounts for two-thirds of the U.S. economy, is often seen as a signal of economic downturn. The June unemployment rate, announced by the Department of Labor on the 2nd, rose to 5.9%, contrary to expectations of a decline, further raising concerns about delayed economic recovery.

◇ Has the U.S. Economy Peaked in Q2? = On the day, the 10-year U.S. Treasury yield fell to 1.26% during the session. Although it later recovered to the 1.3% range, CNBC reported that this was the lowest Treasury yield since February. A decline in Treasury yields means a rise in bond prices. The 30-year yield dropped below 2% to 1.927%. U.S. Treasury yields had surged to 1.8% in April amid inflation concerns, with forecasts predicting a breakthrough of 2% within the year. A major foreign media outlet reported that concerns over slowing economic recovery are reflected in the plunge of U.S. Treasury yields. The spread of the COVID-19 Delta variant also fueled a preference for safe-haven assets.

Despite the drop in U.S. Treasury yields, the dollar index, which shows the value of the dollar against major currencies, rose 0.3%, reaching its highest level since early April.

Kristalina Georgieva, IMF Managing Director
Photo by Reuters Yonhap News

◇ IMF Managing Director Warns of "Risk of Sustained Inflation Rise" = On the same day, Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), stated in a blog post that "there is a risk of a more sustained rise in inflation and inflation expectations," adding that "this could potentially require faster-than-expected U.S. monetary tightening." She pointed out that U.S. rate hikes could lead to sharp global financial tightening and severe capital outflows from emerging markets, posing significant challenges especially for countries with high debt ratios. However, while expressing concern about inflation, she emphasized the need for monetary stimulus to support economic recovery and stressed that "it is crucial to avoid overreacting to temporary inflation increases."

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