[FOMC] Powell's Most 'Hawkish' Remarks During Press Conference... Quantitative Tightening Likely to Begin Around May-June

March Interest Rate Hike Indicated... Possibility of Increase Left Open at Every Meeting

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] After concluding this year's first Federal Open Market Committee (FOMC) meeting on the 26th (local time), the remarks made by Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), are being evaluated as the most 'hawkish' among his press conferences to date.

While the policy statement hinted at a rate hike in March as initially expected, Powell's subsequent press conference left open the possibility of rate increases at all future FOMC meetings. The balance sheet reduction for quantitative tightening is expected to begin around May to June.

◆‘Hawkish’ Powell, "Considerable Room for Rate Hikes"

At the press conference, Chairman Powell clearly signaled that a rate hike would be implemented soon. Although there was no surprise hike in January as some in the market speculated, this has effectively solidified the expectation of a rate increase in March.

Reviewing Powell's key remarks, his judgments differ from past rate hike periods. Comparing to 2015, he emphasized the need for hikes by stating there is "quite a bit of room" to raise rates without threatening the labor market. He also expressed concerns about inflation, noting that "wages are rising rapidly, and there is a risk that sustained real wage growth could exert upward pressure on inflation." Additionally, he added, "The economy no longer requires strong monetary policy support."

In particular, Powell's response to whether there is a possibility of rate hikes at all upcoming meetings was seen as very hawkish. He said he would "navigate the current situation with humility and agility amid two-sided risks," not ruling out 6 to 7 hikes within the year. There are seven remaining FOMC meetings this year. Assuming a 0.25 percentage point increase each time, rates could rise by as much as 1.75 percentage points.

He also left open the possibility of a 0.5 percentage point hike at once. Chris Zaccarelli, Chief Investment Officer (CIO) of the Independent Advisory Council, interpreted this by saying, "He did not say no to the related question," suggesting that rates could be raised more flexibly and faster than the market expects if necessary. JP Morgan assessed, "Powell's press conference was the most hawkish statement he has made as Fed Chair to date."

◆Decision to Start Quantitative Tightening Also Imminent

The Fed is expected to soon provide concrete signals regarding quantitative tightening, the third step following tapering and rate hikes. Wall Street anticipates that the Fed will announce its balance sheet reduction plan around May to June. Bank of America (BoA) commented, "It was somewhat surprising that the Fed separately announced principles for balance sheet reduction today, indicating that the decision to start quantitative tightening is imminent," adding, "The likelihood of an announcement at the May FOMC has increased."

Powell repeatedly confirmed that the upcoming balance sheet reduction will proceed in a predictable manner. However, he also mentioned that if inflation worsens, the Fed could reduce the balance sheet earlier and at a faster pace than initially planned. His statement that "we are prepared to adjust specific details" is also seen as a signal for early quantitative tightening.

Following Powell's hawkish remarks, the stock market fluctuated on the day. Investor fears over market uncertainty grew, resulting in a rollercoaster session for the third consecutive trading day. The Dow Jones Industrial Average and the S&P 500 closed down 0.38% and 0.15%, respectively, compared to the previous session. Meanwhile, U.S. Treasury yields surged sharply. The 10-year yield rose by 0.1 percentage points to 1.86%.

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