Powell Focuses on Blocking Rate Hike Concerns... "Applying Strict Conditions" (Update)

Tapering Expected to End by July Next Year
Temporary Inflation Description Temporarily Revised
Early Rate Hike Possibility Actively Blocked
Market Reflects Increased Possibility of Rate Hikes Next Year
JPMorgan Forecasts "Rate Hikes Will Be Withheld Until End of Next Year"

[Image source=Yonhap News]

[Asia Economy New York=Correspondent Baek Jong-min] Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), stated that asset purchase tapering is not a signal for interest rate hikes and assessed that the economy is experiencing strong growth. While he said strict criteria would be applied to dispel concerns that tapering would lead to rate hikes, there was a subtle change in the expression regarding inflation being temporary.

The Fed announced after a two-day Federal Open Market Committee (FOMC) meeting on the 3rd (local time) that it would keep the benchmark interest rate unchanged and start tapering at the end of this month.

The market evaluated the tapering announcement as expected and focused on the perception of inflation and the timing of interest rate hikes.

In the statement, the Fed changed the word "transitory" regarding inflation to the phrase "expected to be transitory."

The statement said, "Inflation is rising significantly reflecting factors expected to be transitory," and assessed that "supply and demand imbalances related to COVID-19 and the economic reopening have contributed to substantial price increases in some sectors." CNBC reported that since recent Fed officials expressed concerns about rising inflation, the phrase that inflation is transitory was expected to disappear in this statement, but the Fed modified the expression somewhat and maintained the stance that inflation is transitory.

Chairman Powell also explained that the word "transitory" could imply that inflation increases would eventually disappear, so the expression was revised to "expected to be transitory."

Powell judged that inflationary pressures would continue but economic growth would persist.

Powell said, "Supply chain bottlenecks will continue into next year and inflation will rise," but he forecasted that once supply chain bottlenecks ease, growth will continue and inflation will decline.

When asked if inflation management was delayed, he said, "The Fed is appropriately adjusting monetary policy," and insisted, "The Fed is in the right position" and will use tools (interest rate hikes) whenever necessary.

The statement also expected the economy to continue improving even after supply chain issues are resolved.

These remarks are interpreted as the Fed still being cautious about raising the benchmark interest rate. The statement said tapering is not a signal for rate hikes, and Chairman Powell also said, "I do not think it is time to raise rates yet."

Powell emphasized that strict conditions would be applied for rate hikes, as he wants the labor market to heal further.

Powell was not concerned about wage increases. He said inflation was caused by surging demand and bottlenecks, not by a tight labor market, and that he had not seen signs of rapid wage increases or resulting price hikes. He also emphasized that wages are not keeping pace with inflation increases. Powell said it is difficult to predict when supply chain bottlenecks will be resolved, but ultimately they will normalize, although the timing is very uncertain.

Powell expected tapering could be reduced or increased, but if it decreases by $15 billion per month, asset purchases will end by July next year. This sets the stage for the Fed to start raising interest rates.

Although the statement and Chairman Powell blocked the possibility of early rate hikes, the market judged that the likelihood of rate hikes starting in mid-next year has increased. According to the Chicago Mercantile Exchange (CME) FedWatch, the probability of the first rate hike in June next year rose to 61.4% after the tapering announcement. The probability of a July rate hike reached 71.6%.

On the other hand, David Kelly, Chief Global Investment Strategist at JP Morgan Asset Management, predicted that the Fed would refrain from raising rates until the last FOMC meeting in 2022. He estimated that the Fed would raise rates after a certain interval following the end of tapering.

Meanwhile, the U.S. stock market closed higher that day. Although it experienced some correction during the session reflecting FOMC concerns, the Dow Jones Industrial Average rose 0.29%, the S&P 500 gained 0.65%, and the Nasdaq closed up 1.04%. CNBC reported that remarks indicating the economy is growing enough to start tapering stabilized investor sentiment.

The U.S. 10-year Treasury yield expanded its rise after the tapering announcement this month, entering the 1.6% range.

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