One Day Before US Inflation Data, Powell's Hearing... Market May Shock More If Hawkish on Tightening

Senate Confirmation Hearing for Powell on the 11th... First Public Remarks After December FOMC Minutes Release
December 12 US CPI Expected at 7% for the First Time in 40 Years... Concerns Over Rate Hike Caution
Conservative Economist Professor Taylor: "Inflation Response Lagging... Benchmark Rate Should Be 3-6%"

Jerome Powell, Chair of the U.S. Federal Reserve (Fed)
Photo by AP Yonhap News

[Asia Economy New York=Correspondent Baek Jong-min, Reporter Park Byung-hee] The eyes and ears of investors worldwide are focused on the events unfolding consecutively on the 11th and 12th (local time). This is because a series of 'big events' that will have a massive impact on the US monetary policy and markets are about to take place.

Jerome Powell, Chairman of the Federal Reserve (Fed), will attend a Senate confirmation hearing on the 11th. This will be Powell's first remarks since the release of the minutes from the December Federal Open Market Committee (FOMC) meeting last year, which hinted at a rate hike in March and quantitative tightening within the year.

CNBC forecasted that Powell's confirmation hearing will be the 'highlight' to confirm the Fed's response to inflation. If Powell, who has leaned hawkish since President Joe Biden's renomination, delivers tough remarks, the market could be further shocked.

Coincidentally, on the 12th, a day after Powell's speech, the December Consumer Price Index (CPI) from last year will be released. If the CPI soars above the expected 7%, it is highly likely to further heighten concerns about rate hikes.

Progressive Economists Also Criticize Fed's Response

Experts have already criticized the Fed's response to the sharp rise in inflation. At the annual meeting of the American Economic Association (AEA) held on the 7th, economists gathered regardless of progressive or conservative camps, all expressed concerns about inflation.

Lawrence Summers, former Treasury Secretary and a Democrat supporter but critical of the Biden administration's economic policies; Jason Furman, Harvard professor who has been an absolute supporter of the current administration's economic policies; and John Taylor, Stanford professor and Republican known for the 'Taylor Rule,' all emphasized responding to inflation through rate hikes regardless of political affiliation.

Professor Summers argued that interest rates need to be raised significantly over the next year and a half. He said, "Inflation will not stay at 7%, but it would be surprising if it falls to 2%."

Pro-Biden Furman forecasted that the core Personal Consumption Expenditures (PCE) price index will rise by 3.2% this year. This is significantly higher than the Fed's forecast last month of a 2.7% increase in PCE for this year.

Alan Blinder, Princeton professor and former Fed Vice Chairman under the Bill Clinton administration, also said, "It may take time for bottleneck inflation to ease." He criticized the Fed for being slow to recognize inflationary pressures.

The stance of Republican-leaning professors was similar. Professor Taylor argued that the Fed is already behind in responding to inflation and that the benchmark interest rate should be between 3% and 6%. Glenn Hubbard, Columbia University professor and Republican, expressed skepticism about whether the Fed's three rate hikes projected for this year will ease inflationary pressures, issuing an unusual warning that "the Fed will need to be lucky and smart."

Bloomberg reported that Joseph Stiglitz, Nobel laureate and Columbia professor, argued that inflation cannot be curbed by rate hikes alone amid supply chain disruptions, but this view remained a minority opinion.

US Treasury Yields Rise to 1.8%

The market is paying close attention to Treasury yields and the direction of the US stock market. Last week, as the 10-year US Treasury yield rose to 1.8%, the market, especially the Nasdaq, plunged. Leo Grohoski, Chief Investment Officer at BNY Mellon, forecasted, "The 10-year US Treasury yield could rise to 2.25% by the end of this year."

However, there are also expectations that further increases in Treasury yields this week may be limited. Some bargain buying has been observed, and the fact that rising yields could slow the US economy is also cited as a factor that could cap further increases.

The start of corporate earnings announcements is another factor to watch. FactSet expects the net profit growth rate of S&P 500 constituent companies for the fourth quarter of last year to be 21.7%. The net profit margin of S&P 500 companies soared to 91.1% in the second quarter but fell to 39.8% in the third quarter.

The Wall Street Journal analyzed that although corporate net profit margins, which had surged due to the base effect from the COVID-19 pandemic, are declining, they remain higher than average.

The question is whether inflation will lead to deteriorating profitability. In that case, the stock market could face even more turmoil. Jimmy Chung, Chief Investment Officer (CIO) of Rockefeller Global Family Office, explained, "It is a very difficult time for companies to forecast their future business," adding, "Costs have generally risen significantly compared to this time last year."

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