Growing Optimism for Economic Recovery... 'Fed' Guards the Back Door

'Fed' Aims to Confirm Economic Recovery
'Market' Bets on Economic Recovery Outlook

Jerome Powell, Chair of the Federal Reserve (Yonhap News Agency=Reuters)

[Asia Economy Reporter Junho Hwang] On the 4th (local time), the remarks made by Jerome Powell, Chairman of the Federal Reserve (Fed), the central bank of the United States, became a factor in the rise of market interest rates and the decline of the stock market. This has been analyzed as stemming from the gap between policy and the market since the COVID-19 pandemic. While the market is relying on expectations of economic recovery, the authorities want to confirm evidence of such recovery. Accordingly, if the upward trend in market interest rates, represented by the yield on the 10-year U.S. Treasury bond, continues, there is speculation that a response could be expected at the Federal Open Market Committee (FOMC) meeting scheduled for the 18th.

Ilhyeok Kim, a researcher in charge of Cross Asset at KB Securities, analyzed the impact of Powell’s remarks and the rise in oil prices on the market in his report titled "The Market Viewing the Post-Pandemic Era and Policies of the Pandemic Era" on the 6th, stating, "Policy authorities are cautious about premature responses based on economic recovery prospects."

First, Powell’s remarks can be seen as emphasizing the continuation of an accommodative monetary policy stance for a considerable period, as before. Powell stated, "It will take time until conditions are met to consider raising the benchmark interest rate," but did not specify a particular timeline. He explained this by saying, "It is to implement a data-dependent policy," which can be interpreted as meaning that policy decisions will be made only after confirming evidence of economic recovery, moving in a lagging manner relative to the economy.

In particular, Powell mentioned that through the financial crisis and the pandemic, he learned the lesson that "policy tools should be used without hesitation, moving quickly and strongly, and not stopping until the mission is accomplished." This reflects the Fed’s firm commitment to maintaining an accommodative monetary environment for a considerable period.

At this level, the market need not worry about tightening due to benchmark interest rate hikes. However, Powell did not offer alternatives to the sharp rise in market interest rates. Although he said it "caught his attention," he added, "The Fed looks at the financial environment broadly, not just at a single indicator like interest rates." This again confirms his intention not to react hastily to market movements, but conversely, it can also be interpreted as a willingness to observe how far market interest rates will rise.

This cautious approach is also evident in the decision by OPEC+?the coalition of the Organization of the Petroleum Exporting Countries (OPEC) and major non-OPEC oil-producing countries such as Russia?to maintain large-scale production cuts. OPEC+ decided to continue production cuts in April, reflecting member countries’ consensus that "considerable caution is necessary" regarding the outlook that oil demand will increase as the economy recovers.

Researcher Kim interpreted this as, "The market is forecasting economic recovery after the pandemic, but the authorities are clearly stating that policy decisions cannot be made based on such forecasts."

However, whether this gap will persist for a long time depends on the upcoming FOMC meeting on the 18th. Kim predicted, "Although Chairman Powell did not mention specific policy tools (to stabilize market interest rates), he repeatedly said, 'If interest rates rise disorderly and the financial environment tightens, it could be a concern,' and 'If the situation changes significantly, the Fed is prepared to use policy tools to achieve its dual mandate.' This can be interpreted as meaning that appropriate measures could be taken at the FOMC."