When Will the Base Interest Rate Rise... Powell Says "Patience," Market Predicts "As Early as June Next Year" (Summary)

Powell "Now is not the time, strict additional conditions must be met"
Reaffirms cautious stance on rate hikes... Focuses on preventing market instability
Market expects "as early as June"... Citigroup forecasts three hikes next year
Central banks accelerate tightening... UK likely to raise base rate

[Image source=AP Yonhap News]

[Asia Economy New York=Correspondents Baek Jong-min, Park Byung-hee, Kim Su-hwan] On the 3rd (local time), 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 shifting to the timing of the base interest rate hike.

On the day, Jerome Powell, Fed Chair, drew a line by saying, "The tapering decision is not a direct signal that an interest rate hike is being considered." However, the market expects the first rate hike as early as June next year. Accordingly, the tightening clocks of central banks worldwide are also expected to accelerate.

Powell: "No Discussion of Rate Hike"

Chair Powell emphasized that "now is not the time to raise interest rates," and that there was not even a discussion of a rate hike at this Federal Open Market Committee (FOMC) meeting.

He said, "We will wait to see how the economy develops until mid-next year," and "The central bank can be patient regarding rate hikes." He added, "Additional stringent conditions must be met for a rate hike."

Recently, inflation rose by as much as 5.4% over one year, prompting hawkish Fed officials to call for an early rate hike, but the overall Fed atmosphere was confirmed to be cautious about raising rates.

Chair Powell had argued that inflation was temporary and that further progress was needed to start tapering, but now he focused on blocking concerns about rate hikes. Powell has prevented market anxiety during the Fed's monetary policy normalization process, which was previously called a 'tightening convulsion.'

Powell also forecasted that economic growth would continue. While expecting inflation and supply chain issues to persist, he also asserted that inflation remains temporary and that the U.S. economy will continue to grow.

Powell said, "Supply chain bottlenecks will continue next year, and inflation will rise," but he predicted that once supply chain bottlenecks ease, growth will continue and inflation will decline. He said the labor market could achieve maximum employment in the second half of next year and that the economic growth rate is expected to rebound this quarter.

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

In the Fed's statement that day, the word "transitory," which had been used to evaluate inflation, changed to "expected to be transitory," attracting attention. While avoiding definitive expressions, the Fed maintained its stance that inflation is temporary.

CNBC reported that since recent Fed senior officials were concerned about rising inflation, it was expected that the expression "inflation is transitory" would disappear from this statement, making the response surprising.

Powell was not worried 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 leading to price rises.

First Rate Hike as Early as June Next Year

Opinions differed on the timing of the rate hike. Citigroup advanced its first rate hike forecast from December next year to June and expected three rate hikes within the year. The Chicago Mercantile Exchange (CME) FedWatch expanded the possibility of the first rate hike in June next year to 61.4%. Bank of America suggested the first rate hike would be in the fourth quarter of next year.

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 of 2022. UBS also expected no rate hikes during next year.

According to Bloomberg News, in the U.S. bond market that day, the yield curve between short- and long-term rates widened, and the expected inflation rate, measured by the difference between the 10-year Treasury yield and Treasury Inflation-Protected Securities (TIPS) yield, rose by 0.04 percentage points to 2.56%. This indicates increased expectations of price rises due to economic recovery.

Market Initially Relieved

On that day, the Dow Jones Industrial Average closed up 0.29%, the S&P 500 rose 0.65%, and the Nasdaq gained 1.04%. CNBC reported that the mention of economic growth sufficient 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.

On the 4th, the KOSPI at 9:22 a.m. was 3,006.09, up 30.38 points (1.02%) from the previous day. In the Seoul foreign exchange market at 9:21 a.m., the won-dollar exchange rate was 1,177.8 won, down 3.8 won from the previous day's closing price.

Lee Won-geok, First Vice Minister of Strategy and Finance, said at the macroeconomic and financial meeting that the FOMC's tapering result "was absorbed in the international financial market without major difficulties and is expected to have a limited impact on the domestic financial market."

Central Banks Worldwide Likely to Accelerate Tightening

With the U.S. starting tapering, movements in other countries are expected to become active.

First, the UK may raise its base interest rate at the monetary policy meeting on the 4th. Governor Andrew Bailey has changed his previous stance that inflation would be temporary and is recently tightening monetary policy responses. On the 17th of last month, he said, "The Bank of England (BOE) will take action to prevent the spread of inflation expectations." Goldman Sachs and JP Morgan Chase expect the BOE to raise the base rate to 0.25% at the monetary policy meeting on the 4th.

The Bank of Canada ended its quantitative easing policy early at the monetary policy meeting on the 27th of last month. The Bank of Canada also indicated that it might bring forward the timing of the base rate hike, originally expected in the second half of next year, to mid-next year.

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