"The Inevitable Has Come" Sparks US Tightening Debate

Inflation Concerns Become Reality
Fed Denies Again... Controversy Spreads
Stock, Bond, and Forex Markets in Turmoil

[Image source=Reuters Yonhap News]

[Asia Economy New York=Correspondent Baek Jong-min] Inflation concerns in the United States, which is recovering from the damage caused by COVID-19, have become a reality. As the inflation rate soared beyond expectations, forecasts that the tightening period will be brought forward are being seriously raised, while the Federal Reserve (Fed) denies this and is trying to soothe the market. However, the fact that the 'lid of tightening' has begun to open in the U.S. is expected to have a considerable impact on the global financial market.

On the 12th (local time), the U.S. Consumer Price Index (CPI) for April rose 4.2% compared to the same month last year. As a result, the U.S. 10-year Treasury yield surged to 1.695%. The inflation rate, which was significantly higher than the market expectation of 3.6%, affected the entire financial market following the bond market.

On the New York Stock Exchange, the Dow Jones Industrial Average fell 1.99%, the S&P 500 dropped 2.14%, and the Nasdaq index plunged 2.67%. The Asian markets that opened afterward also showed weakness. South Korea's KOSPI index started at 3146.97, down 0.46%, and as of 9:34 a.m., it was at 3140.81. Japan's Nikkei index fell by 1.6%. As of 9:05 a.m. on the same day, the won-dollar exchange rate in the Seoul foreign exchange market rose by 7.4 won from the previous day's closing price to 1132.1 won per dollar.

The higher-than-expected inflation naturally leads to the possibility of tightening. Michael Hanson, an economist at JP Morgan, said, "We maintain the forecast that the Fed will begin to reduce the pace of asset purchases early next year." He predicted that if the May employment data recovers from April's sluggishness, discussions on reducing asset purchases by $120 billion per month could begin at the June Federal Open Market Committee (FOMC) regular meeting. JP Morgan expects the timing of asset purchase reduction to be early next year.

On the other hand, Nomura Securities assessed that inflation concerns are excessive. Nomura judged that although the 10-year expected inflation rate soared to the highest level since 2012, the Fed's firm stance means it will not affect the monetary policy direction.

On the same day, Fed officials again drew a line against early normalization of monetary policy. Richard Clarida, Vice Chairman of the Fed, said, "I was surprised by the CPI surprise increase, but it is just one data point," emphasizing, "The price increase is a base effect and is likely to have only a temporary impact."

Regarding this, The New York Times (NYT) reported that the sharp rise in CPI is fueling debates about inflation and tightening.