US Fed to End Tapering by March Next Year and Raise Interest Rates Three Times (Summary)

Inflation Response... Major Shift in Monetary Policy
Tapering Scale Set at $30 Billion from January
Interest Rate Hike Expected as Early as March Next Year

Inflation Surges to 6.8%
Shift from Economic Support to Containment
Market Impact Expected to Be Limited
New York Stock Market Turns Bullish

Hawkish Analysis Wearing Dove Mask
Rates Raised Three Times but Still Low
Next Year's Increase Limited to 0.9%

[Image source=Yonhap News]

[Asia Economy New York=Special Correspondent Baek Jong-min, Reporter Gong Byung-seon] The U.S. central bank, the Federal Reserve (Fed), announced that it will complete tapering (asset purchase reduction) by March next year and conduct three interest rate hikes next year. Analysts say this marks a sharp pivot from the previously accommodative monetary policy in response to rapid inflation.

On the 15th (local time), after a two-day Federal Open Market Committee (FOMC) regular meeting, the Fed stated in its announcement that "imbalances between supply and demand continue to raise inflation levels," and announced that it will increase the tapering amount from the current $15 billion per month to $30 billion starting January next year. If this continues, tapering will end by March next year, making interest rate hikes possible. This means the quantitative easing policy introduced in March last year to support the economy during the COVID-19 situation will finally come to an end.

The early end of tapering is expected to lead to rapid interest rate hikes. According to the dot plot separately released by the Fed, all 18 Fed officials marked interest rate hikes for next year. This contrasts with the September dot plot, which showed a 50-50 chance of rate hikes next year. The market is now confident of rate hikes within the first half of the year. Some scenarios even suggest a rate hike as early as March next year.

The inflation situation, which changed significantly over three months, prompted the Fed's sharp pivot. The November Consumer Price Index (CPI) surged to 6.8%, and the Producer Price Index (PPI) rose to 9.6%. The Fed also removed the term "transitory" from its statement regarding inflation.

Fed Chair Jerome Powell said in a separate press conference, "The economy is rapidly moving toward full employment," and stated that economic support is no longer necessary. The market interpreted the Fed's pivot as a resolution of uncertainty. The Nasdaq, sensitive to interest rates, surged 2.2%, and the New York stock market successfully rebounded. On the 16th, the Korean stock market's KOSPI started higher compared to the previous trading day, rising to the 3010 level in early trading.

◆Possibility of March Rate Hike... Market Sees "Resolution of Uncertainty"

On the 15th (local time), the U.S. central bank, the Federal Reserve (Fed), finally declared war on inflation. However, it did not raise the attack intensity to the maximum and also prepared for variables such as the potential impact of the Omicron variant. The December FOMC regular meeting held this time was evaluated as the most important meeting since COVID-19. With the early end of tapering virtually certain, the number and timing of future rate hikes were the market's focus.

The Fed accelerated sharply just one month after deciding on tapering. Inflation soaring to 6.8% provided the decisive reason for the Fed to shift from economic support to inflation control.

Chair Powell said at the press conference, "We will be in a position to raise rates not long after tapering ends." He also said there would be no rate hikes before tapering is completed.

Following this statement, the Chicago Mercantile Exchange (CME) FedWatch tool raised the probability of a rate hike in March, when tapering ends, to 45.5%. Just a month ago, the probability of a March rate hike was 20%. Predictions for the timing of rate hikes have been moving earlier, from June to May and now closer. Bank of America Global Securities also revised its forecast to expect the first rate hike in March.

Expectations that rate hikes would hurt the market were off the mark. The New York stock market turned bullish that day. The domestic market, having shaken off uncertainty, is also rebounding. The KOSPI surpassed the 3000 mark from the start of trading, supported by buying from foreigners and institutions. The KOSDAQ also rose more than 1%.

The resolution of FOMC-related uncertainty is interpreted as having a positive impact on domestic and international stock markets. Julian Timmer, Global Macro Director at Fidelity Investments, said, "The Fed gave a positive message to the market rather than turning a blind eye to inflation." Shin Dong-gil, a researcher at Shinhan Financial Investment, explained, "The U.S. monetary authorities turning hawkish is bad news for the domestic stock market, but paradoxically it helped eliminate uncertainty. The recent domestic market volatility had already priced this in, which also influenced today's rebound."

◆A Hawk in Dove's Clothing?

Although the Fed has turned hawkish, some analysts say it is still wearing a dove's mask. According to the Fed officials' dot plot, the total rate hike next year is only 0.9%. Even with three hikes in 2023, the rate will only reach 1.6%. In 2024, the rate is expected to be 2.1%.

Mike Rosengart, Investment Strategist at E*Trade Financial, said, "Even after three rate hikes next year, we will still remain in historically low interest rate territory," and evaluated that the Fed's clear timetable for rate hikes had a positive effect on the market.

Krishna Guha, analyst at Evercore ISI, diagnosed, "The Fed's statement is hawkish but not extreme. In fact, some parts have a dovish character."

There is also analysis that the Fed cannot raise rates unconditionally. The U.S. 10-year Treasury yield was at 1.472% that day, showing little change. Meanwhile, the 2-year Treasury yield, reflecting short-term rates, rose rapidly.

This further flattened the yield curve. The market signals that short-term rates are likely to rise, but long-term economic growth is expected to be sluggish. Yahoo Finance warned that if the Fed raises rates, the 2-year Treasury yield will rise while the 10-year yield stagnates, potentially signaling a recession. When long-term yields fall below short-term yields, it is generally recognized as a recession signal.

Chair Powell also said support for employment must be considered. He noted that while the unemployment rate is falling, the labor force participation rate remains disappointing.

The New York Times identified that the COVID-19 situation and the great resignation wave complicate the Fed's path toward its maximum employment goal.

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