Even US Opposition Lawmakers Break Taboos to Demand Austerity

[Asia Economy New York=Correspondents Baek Jong-min, Park Byung-hee, Kim Eun-byeol, Kim Su-hwan] The US Consumer Price Index (CPI) for April was announced at a level exceeding expectations, prompting calls for the Federal Reserve (Fed) to reconsider its monetary policy. The plan of US President Joe Biden, who is pushing for an additional $4 trillion physical and human infrastructure investment bill, is also expected to face setbacks. This is because the opposition Republican Party now has grounds to restrain President Biden from further fiscal (dollar) spending by citing inflation risks.

Immediately, Republican Senator Pat Toomey unusually demanded that the central bank Fed reconsider its monetary policy. It can be seen as breaking the taboo of opposition lawmakers intervening in Fed's monetary policy.

◆ Sharp rise in Korea-US government bond yields = On the same day, the US Department of Labor announced that the April Consumer Price Index (CPI) rose 4.2% year-on-year. This greatly exceeded Wall Street analysts' forecast of 3.6%, marking the largest increase since September 2008. Financial markets were shaken. The S&P 500 index plunged 2.11%, and all three major New York stock indices recorded declines in the 2% range. The US 10-year Treasury yield closed at 1.69%, up 0.07 percentage points from the previous day, the largest daily increase since March 18. The dollar also strengthened, with the Bloomberg Dollar Spot Index rising 0.7%.

The Korean government bond market yields are also fluctuating. As of 9:56 a.m. on the 13th, the 10-year Korean government bond yield was trading at 2.166%, surpassing this year's highest point of 2.152%. The yield, which had been in the 1.9-2% range for over a month since mid-March, broke through 2.1% on the 30th of last month and is rising about 4 basis points (1bp=0.01 percentage point) on this day as well. The 3-year government bond yield is around 1.144%, up about 1.5 basis points from the previous day. Market insiders expect that the government bond yields, having broken this year's high, may remain at elevated levels through the second half of the year.

Sophie Griffiths, an analyst at Oanda Markets, said in an interview with Forbes on the day, "The fear that the government's large-scale fiscal spending combined with the economic reopening will cause rapid inflation is spreading throughout the market."

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◆ Will tightening be accelerated... Bank of Korea also closely watching = On Wall Street, there are views that the Fed may accelerate tightening measures. It is only a matter of time before the Fed shifts to tightening. Chris Zaccarelli, an investment advisor, said, "Whether inflation will come or not is no longer important. Inflation is almost certain," adding, "The key is for the Fed to shift to tightening at the right time." Muhammad El-Erian, chief economic advisor at Allianz Germany, pointed out, "If the Fed maintains its current assessment of prices, there is a risk of policy failure and market turmoil." Stanley Druckenmiller, chairman of Duquesne Family Office and a legend in the US hedge fund industry, said, "Fed's rate hikes will make it impossible to manage the government's debt accumulated through massive fiscal spending."

Contrary to some experts' concerns, there is also a view that inflation will not be prolonged. Bank of America emphasized, "The rise in consumer prices last month is a temporary phenomenon," adding, "It does not necessarily mean prolonged inflation."

The Bank of Korea is also closely monitoring market conditions. If prices rise and market interest rates continue to increase, it may become difficult to hold off on raising the base rate. The Bank of Korea currently maintains the historically lowest base rate at 0.50% per annum, but if the gap between market interest rates and the base rate widens too much, interest rate distortions may occur.

Fed Vice Chair Richard Clarida maintained the Fed's existing stance at the National Association for Business Economics (NABE) symposium on the day. He said, "The April Consumer Price Index (CPI) far exceeded my expectations, and I was surprised by the inflation indicators."

However, Vice Chair Clarida emphasized, "The price increase is due to base effects and is likely to have only a temporary impact," adding, "It is prudent and appropriate to gather additional evidence before shifting monetary policy." He added, "While the inflation rise is likely temporary, if it continues to rise, the Fed will not hesitate to take action."

The Wall Street Journal (WSJ) diagnosed that the Fed is not ready to taper asset purchases and is not considering rate hikes, expecting confusion in economic indicators. WSJ judged that the Fed would not be shaken by surprise indicators because it anticipated what would happen when demand increases due to economic reopening combined with bottlenecks. The Chicago Mercantile Exchange's Fed Watch tool assessed that the probability of the Fed raising the base rate in December is only 8%.

◆ Biden's stimulus plan also shaken = The Biden administration's $2.3 trillion infrastructure development plan is increasingly likely to face setbacks. Bloomberg reported, "The Republican Party is already launching attacks on the Biden administration by citing the stagflation during former President Jimmy Carter's era," adding, "Within the ruling party, skeptical voices about President Biden's large-scale fiscal spending plan may emerge due to the CPI figures."

In fact, on the same day, Senator Toomey tweeted, "Inflation has become clear, and the Fed can no longer pretend that inflation is a distant problem," adding, "It is time for the Fed to reconsider its accommodative monetary policy."

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