US Begins Tightening Money Supply... Tapering to Start at Month-End (Comprehensive)

Fed Announces Start of Monetary Policy Normalization
Draws Line Against Early Rate Hikes

[Image source=Reuters Yonhap News]

[Asia Economy New York=Correspondent Baek Jong-min] The U.S. central bank, the Federal Reserve (Fed), will begin tapering asset purchases starting this month. The normalization of the emergency monetary policy response to COVID-19, which began in March last year, is finally underway. As the Fed, the central bank of the world, starts to tighten the money supply, central banks worldwide are also expected to follow suit with interest rate hikes and other monetary policy normalizations.

On the 3rd (local time), the Fed announced after the Federal Open Market Committee (FOMC) regular meeting that it will reduce its monthly asset purchases by $15 billion from $120 billion.

The Fed stated, "Since December last year, the economy has recovered significantly," and added, "We judge that reducing asset purchases is appropriate, but we are prepared to adjust the pace of purchases depending on changes in the economic outlook." This means that if the economic situation changes, the tapering scale could be reduced or expanded. If the economy worsens, the end of tapering could be delayed, and conversely, it could be accelerated.

If the plan announced that day proceeds as scheduled, asset purchases will end in June next year after eight rounds of tapering. The September FOMC minutes released by the Fed also showed that Fed officials agreed that asset purchases should be reduced by $15 billion each month.

U.S. media evaluated that the Fed, which had shown dovish behavior, started monetary policy normalization early in response to the sharp rise in inflation. The analysis is that with employment already largely recovered and inflation soaring, there was no longer a basis to continue asset purchases.

The Fed reiterated on the same day that inflation is temporary. The statement said, "Inflation is rising largely due to factors expected to be temporary," and assessed that "supply and demand imbalances related to COVID-19 and the economic reopening have contributed to significant price increases in some sectors."

Previously, the Fed had used definitive expressions that inflation was temporary, but this statement changed to reflect that temporary factors are influencing inflation.

The stance that inflation is temporary is linked to the next step in monetary policy normalization, which is interest rate hikes. The Fed kept the benchmark interest rate at near zero (0.00?0.25%) and emphasized that tapering is not a signal for a rate hike, aiming to prevent premature market judgments.

The Fed's released dot plot forecasted interest rate hikes next year. Regarding this, JP Morgan Asset Management predicted that the Fed would wait to observe the inflation situation until the end of next year before taking action, rather than rushing into rate hikes.

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