Tapering Approaches Reality... Fed Likely to Start Within This Year (Update)

Consensus on Achieving Inflation and Employment Targets
Growing Demand to Shorten Asset Purchase Reduction Timetable
Decision Expected Through Powell's Consensus Building

[Image source=AP Yonhap News]

[Asia Economy New York=Correspondent Baek Jong-min] The U.S. Federal Reserve (Fed) has presented a timeline indicating it will begin tapering asset purchases within the year. Although there is some opposition, the majority of senior officials believe that inflation and employment targets will be achieved within the year. The pace of tapering is also likely to proceed faster than in the past.

The Fed is expected to approach interest rate hikes cautiously even after tapering. This is due to the 'trauma' from the economic downturn that followed the reduction of asset purchases and rate hikes initiated in response to the global financial crisis. Jerome Powell's reappointment could also be a variable affecting future monetary policy direction.

The Vanishing Asset Purchases: Ending the Role as Economic Savior

The quantitative easing conducted by the Fed in three rounds to overcome the 2008 financial crisis reemerged as an economic savior during the COVID-19 pandemic but is now fading into history once again.

After the COVID-19 outbreak, the Fed supplied liquidity to the market by purchasing $80 billion in U.S. Treasury securities and $40 billion in mortgage-backed securities (MBS) monthly. Along with the sudden zero interest rate policy, these asset purchases stabilized the U.S. financial market and the economy recovered rapidly.

As the economy recovered, inflation rose above 5%, and employment improved, tapering asset purchases became a matter of timing. While Wall Street had expected tapering to begin early next year, the recent continued strength of the U.S. economy has increased the possibility of tapering starting within this year.

The Wall Street Journal (WSJ) reported that Fed officials have agreed to start tapering in November. The scenario is that Chairman Powell will hint at tapering possibilities at the Jackson Hole meeting at the end of this month, finalize the decision at the September FOMC, and implement tapering starting in November.

[Image source=Reuters Yonhap News]

Growing Calls for Early Tapering

Many senior Fed officials have also actively called for an early start to tapering.

Eric Rosengren, President of the Boston Federal Reserve Bank, argued in an interview that asset purchases should end promptly. Rosengren urged that tapering should be decided at next month's FOMC meeting, start within this year, and be completed by mid-next year.

Rosengren diagnosed that continuing asset purchases amid supply chain issues limiting economic growth is not an appropriate response.

He repeatedly emphasized that the current situation differs from the post-2008 financial crisis asset purchase environment. He pointed out, "The problem is not that consumers are not buying goods and services, but that securing labor and raw materials is difficult," and evaluated that "in this environment, asset purchases are triggering inflation increases and undermining efforts to return to sustainable inflation."

James Bullard, President of the St. Louis Federal Reserve, who has transformed from a 'king dove' to a hawk, also expressed concern in an interview that "if the Fed overlooks rising inflation to delay a shift away from accommodative monetary policy, it may face a very destructive form of policy change." He also emphasized that slow changes are a lesson left by the 2008 global financial crisis.

[Image source=Reuters Yonhap News]

Bullard also proposed a relatively fast timeline for completing tapering by the first quarter of next year. He mentioned that completing tapering early is necessary to prepare for interest rate hikes. He reiterated his opinion that rate hikes should begin by the end of 2022.

There are also doves opposing tapering within the year. A representative example is Lael Brainard, a Fed Board member who is considered a potential next Fed Chair. Mary Daly, President of the San Francisco Federal Reserve Bank, while stating that more progress in employment is needed, also raised the possibility of tapering within the year.

Dovish officials also express concerns that implementing tapering could lead the Fed to rush interest rate hikes or reduce efforts to support employment recovery.

Dovish Powell’s Attempt at Consensus... Interest in Tapering End Timing

It is widely analyzed that the Fed’s tapering decision will likely be made through mediation by Chairman Jerome Powell. The minutes of the recent FOMC meeting do not differ significantly from the situation described by Powell.

The Wall Street Journal predicted, "Chairman Powell will need to lead the consensus among the 17 FOMC members."

Powell stated at the July FOMC press conference, "There were various views on the timing of tapering." Until now, Powell has refrained from making specific comments on the timing of tapering.

Since tapering has been a topic of considerable debate for some time, market reactions have been limited.

The yield on the U.S. 10-year Treasury note, which is expected to decline due to tapering, rose by 0.017% from the previous day to 1.275%. The dollar index increased by 0.02% to 93.165. As the U.S. begins monetary normalization, the dollar is likely to continue strengthening.

The stock market was relatively more affected. The Dow Jones Industrial Average fell by 1%, the S&P 500 index dropped by 1%, and the Nasdaq index declined by 0.84%.

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