'Early Rate Hike in March Possible... US Tightening Clock Ticks Faster'

Fed Hints at Early Quantitative Tightening
US Treasury Yields Surge, Stock Market Plummets
USD/KRW Exchange Rate Exceeds 1200 Won

[Image source=Reuters Yonhap News]

[Asia Economy New York=Correspondent Baek Jong-min] The U.S. central bank, the Federal Reserve (Fed), indicated a rate hike in March and quantitative tightening within the year. As the Fed signaled an aggressive stance to curb inflation, U.S. Treasury yields surged sharply and global stock markets fluctuated, delivering a significant shock to financial markets. The won-dollar exchange rate surpassed 1,200 won for the first time in six months.

According to the minutes of the December Federal Open Market Committee (FOMC) released by the Fed on the 5th (local time), meeting participants mentioned that "considering the economic, labor market, and inflation outlooks, it may be justified to raise the benchmark interest rate earlier or faster than previously expected." This was interpreted as a signal that rate hikes could begin immediately after tapering (asset purchase reduction) concludes in March.

The minutes further stated, "Participants discussed quantitative tightening, and a considerable number pointed out that it might be appropriate to start reducing the Fed's balance sheet relatively early after the initial rate hike." This means the Fed plans to reduce assets that had expanded up to $8.8 trillion in response to the COVID-19 economic crisis to induce interest rate increases. The minutes also forecast that quantitative tightening will proceed faster than in the past.

As the Fed strengthened its hawkish stance, the market fell into turmoil. This was because the prospect of the Fed implementing quantitative tightening quickly after a rate hike was rare.

Immediately after the minutes were released, the U.S. 10-year Treasury yield soared to 1.71%. Due to the sharp rise in Treasury yields, the Nasdaq index plunged by 3.3%. The Dow Jones Industrial Average, which had been rising on expectations of economic normalization, reversed its upward trend and fell by 1%. Bitcoin, considered a risky asset, also recorded an intraday price in the $42,000 range.

On the 6th, the KOSPI opened at 2,925.40, down 0.97% from the previous day. The KOSDAQ started at 993.60, down 1.59%. In the Seoul foreign exchange market that day, the won-dollar exchange rate opened at 1,200.9 won, up 4 won. This was the first time since July 27, 2020 (1,201.2 won) that the opening exchange rate exceeded 1,200 won. With the U.S. continuing quantitative tightening and the dollar strengthening, it is expected that the won-dollar exchange rate will remain above 1,200 won.

Casey Jones, Head of Bonds at Charles Schwab, explained, "The market inevitably experiences shocks during the transition from accommodative to tightening monetary policy."

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