'Entering Tapering' When Will the Fed Raise Interest Rates?…Market Focuses on July Next Year

Goldman Sachs "Interest Rate Hike Starts in July Next Year... Additional Increase in November"
Attention on Whether UK Central Bank Will Preemptively Raise Base Rate on 4th

U.S. Expected Inflation Rate Trend (10-Year Treasury Bond - 10-Year Treasury Inflation-Protected Securities (TIPS) Yield Spread) [Image Source= Bloomberg]

[Asia Economy Reporter Park Byung-hee] As the U.S. central bank, the Federal Reserve (Fed), officially announced the start of tapering (asset purchase reduction) at the end of this month, investors' attention is now shifting to the timing of the base interest rate hike.

Fed Chair Jerome Powell drew a line at the press conference, saying, "The tapering decision is not a direct signal that we are considering a base interest rate hike." However, Bloomberg reported on the 3rd (local time) that the U.S. bond market is increasing expectations for a base rate hike as the yield spread between long-term and short-term bonds widens.

On that day, the yield spread between the 10-year and 2-year U.S. Treasury bonds rose by 0.04 percentage points from the previous day, expanding to 1.13 percentage points. Typically, an expanding yield spread between long-term and short-term bonds is interpreted as a signal of economic improvement. It also means that expectations for inflation due to economic recovery are rising.

Bloomberg explained that the yield spread widened as long-term yields rose relatively faster, and at the same time, indicators showing inflation expectations in the bond market also increased.

The yield spread between the 10-year Treasury bond and Treasury Inflation-Protected Securities (TIPS), which shows future inflation expectations, also rose by 0.04 percentage points that day to 2.56%. The spread between Treasury bonds and TIPS started at 2% this year, surpassed 2.5% in May, marking the highest level in 10 years. After rising to 2.69% at the end of last month, it stalled but has been rising again this week, centered on the FOMC meeting.

Bloomberg explained that considering short-term financial market indicators, the financial market reflects a 70% probability that the Fed will raise the base interest rate around July next year. It also expects the U.S. base interest rate to increase by 0.55 percentage points by the end of next year.

This is almost consistent with the Fed's future actions predicted in a report released by Goldman Sachs on the 29th of last month. Goldman Sachs expected the Fed to conduct tapering over eight months from November to June next year, followed by a base rate hike in July and an additional rate hike in November.

The question of whether the Bank of England (BOE), the central bank of the United Kingdom, will raise its base interest rate is also attracting attention. The BOE will hold a monetary policy meeting on the 4th. The UK has proactively lifted COVID-19 restrictions, and recently, the sharp rise in natural gas prices has increased inflation risks. Governor Andrew Bailey has also changed his previous stance that inflation would be temporary and is considering a monetary policy response. On the 17th of last month, he said, "The BOE will take action to prevent the spread of inflation expectations."

Goldman Sachs and JP Morgan Chase expect the BOE to raise the base interest rate by 0.25% at the monetary policy meeting on the 4th.

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