Fed's Powell Hints at 'Tolerating Short-Term Inflation'... Exchange Rate at 1,130 Won After Four Months (Summary)

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed)
[Photo by AP]

[Asia Economy Reporter Kim Eun-byeol] On the 5th, the KRW-USD exchange rate surpassed the 1,130 won level during the session due to disappointment over remarks by Jerome Powell, Chair of the U.S. Federal Reserve (Fed). It is the first time since November 5 last year (1133.9 won, intraday high), right after the U.S. presidential election, that the KRW-USD exchange rate recorded above 1,130 won during the session. The closing exchange rate had consistently stayed below 1,130 won since November 4 last year, when it recorded 1,137.7 won.

As of 10 a.m. on the same day in the Seoul foreign exchange market, the KRW-USD exchange rate was trading at 1,131.82 won, up 6.72 won from the previous day's closing price. The exchange rate started at 1,132.0 won per dollar, up 6.9 won, and has been moving in the low 1,130 won range.

Since early November last year, when Joe Biden was elected U.S. president, the financial market expected an increase in dollar supply and predicted a weaker dollar. However, recently, with rising expectations of economic recovery, U.S. Treasury yields have increased, leading to a stronger dollar. The higher the bond yields, the greater the demand for the corresponding currency.

On the 4th (local time), Fed Chair Powell stated at an online job-related event hosted by The Wall Street Journal (WSJ), "We are still far from the goals of maximum employment and average 2% inflation," and added, "It will take some time before the Fed considers raising interest rates." When asked whether the Fed's maximum employment goal could be achieved within this year, he replied, "I think it is very unlikely."

Regarding inflation, he expressed the view that if the price increases are temporary rather than persistent, they will monitor the situation. He said, "If long-term inflation expectations remain stable and generally consistent with our (policy) framework and goals, and inflation is considered a temporary rise, we will be patient."

He reiterated the view that accommodative monetary policy will be maintained for a considerable period and did not present policies responding to the rise in Treasury yields, which disappointed the market. The market had expected signals regarding 'Operation Twist,' which involves selling short-term bonds and buying long-term bonds, or extensions of bank capital regulation relief, but there were no mentions of these. He also did not provide a clear stance on whether the economic situation would improve enough to reduce bond purchase volumes within this year.

Following Chair Powell's remarks, the 10-year U.S. Treasury yield surged to the mid-1.5% range, and the New York stock market fell sharply. The Dow Jones Industrial Average (-1.11%), S&P 500 Index (-1.34%), and Nasdaq Index (-2.11%) all declined. As of 11:12 a.m., the KOSPI index also showed a downward trend after breaking below the 3,000-point level.