[Good Morning Stock Market] Expected Fed Moves... Easing Burden of Monetary Policy Schedule

Fed Accelerates Tapering as Expected and Forecasts 3 Rate Hikes Next Year
New York Stock Market Rebounds... Nasdaq Up 2.15%

[Image source=Yonhap News]

[Asia Economy Reporter Gong Byung-sun] The U.S. Federal Reserve (Fed) announced through the Federal Open Market Committee (FOMC) that it will accelerate the pace of tapering. Although it projected three interest rate hikes next year, the stock market responded positively as this was already anticipated by the market.

On the 15th (local time), the New York stock market rebounded. On the New York Stock Exchange that day, the Dow Jones Industrial Average closed at 35,927.43, up 1.08% (383.25 points) from the previous trading day. The S&P 500 index closed at 4,709.85, up 1.63% (75.76 points) from the previous session. The tech-heavy Nasdaq closed at 15,565.58, up 2.15% (327.94 points) from the previous trading day.

◆ Seo Sang-young, Researcher at Mirae Asset Securities = The Fed indicated through the FOMC that it will expand the asset purchase reduction (tapering) pace to $30 billion per month (approximately 35.625 trillion KRW) and plans to end it by March next year. Additionally, the dot plot forecasted three interest rate hikes next year, reflecting a hawkish stance. The unemployment rate for next year was revised down from 3.8% to 3.5%, and core inflation was revised up from 2.3% to 2.7%.

The financial market initially reacted with a decline in stock indices to this news. However, since it was already expected, buying quickly returned, and the Nasdaq, which had fallen nearly 1%, soon turned upward.

Meanwhile, Fed Chair Jerome Powell stated at a press conference that the pandemic caused longer-than-expected inflation, and that high wage increases are not a cause of rapid inflation. This suggests that high inflation will be temporary and that inflation may ease next year, which is a positive factor for the stock market. Furthermore, Fed officials claim they are forecasting a gradual path of interest rate hikes based on this.

(Provided by Daishin Securities)

◆ Gong Dong-rak, Researcher at Daishin Securities = The Fed has formalized doubling the pace of tapering. At the same time, the start of next year’s base interest rate hikes is expected to be brought forward, and the number of hikes is likely to increase.

This FOMC attracted attention for confirming the central bank’s views on whether to accelerate the tapering schedule, which officially began last month, and the timing of the upcoming base interest rate hikes along with the rate decision. The persistently high inflation and Chair Powell’s remarks suggesting a shift in the Fed’s inflation outlook raised expectations that the gradual normalization of monetary policy might change.

The changes in the monetary policy schedule have been gradually exposed to the financial market over a considerable period. During this process, expectations formed that tapering would accelerate and interest rate hikes would come sooner, while forecasts that the final destination of the upcoming rate hike cycle would fall short of the neutral rate indicated by Fed officials were also reflected in market expectations.

Through the December FOMC, the Fed’s monetary policy stance shifted one step more hawkish than before, but it is important to note that this was done through significant communication with the financial market and a preemptive process. Moreover, the earlier timing of the rate hikes will likely ease the burden on future monetary policy schedules and reduce shocks to the financial market.

(Provided by Samsung Securities)

◆ Jeong Sung-tae, Researcher at Samsung Securities = China’s major economic indicators for November continued to show weakness. This was mainly due to investment contraction caused by the sluggish real estate market and poor face-to-face services due to the spread of COVID-19.

China’s fixed asset investment in November recorded 5.2% year-on-year growth, falling short of the market forecast of 5.4%. This was due to weak real estate investment. Although real estate investment was favorable at 6% year-to-date compared to the previous year, November alone showed -4.2%, marking the third consecutive month of decline.

Retail sales in November also grew 3.9% year-on-year, below the market forecast of 4.7% and October’s 4.9%. By category, automobile sales and dining out were significantly weak. Automobile sales decreased by 8.9% year-on-year, marking seven consecutive months of decline. This is analyzed to be mainly due to demand contraction and a shift to electric vehicles causing waiting demand, rather than production disruptions from semiconductor shortages. Dining out decreased by 3.6% year-on-year due to China’s lockdown-focused quarantine policies. Since dining out represents face-to-face services, it can be inferred that travel and cultural sectors were also weak.

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