CNBC "Fed to Begin Tapering Around Year-End"

Initial Stage Assessment to Secure Market Response Time
US Treasury Yields Remain in the 1.5% Range After Employment Data Release

[Image source=AP Yonhap News]

[Asia Economy New York=Correspondent Baek Jong-min] The U.S. central bank, the Federal Reserve (Fed), is expected to begin discussions on tapering asset purchases at the upcoming Federal Open Market Committee (FOMC) regular meeting next week.

CNBC reported on the 7th (local time) that the Fed is in the initial stage of preparing the capital market for tapering. CNBC further predicted that tapering could begin as early as the latter half of this year.

CNBC's scenario is as follows: tapering discussions will start at this month's FOMC meeting, with a tapering decision announced in late summer or early fall. Subsequently, asset purchase reductions are expected to be implemented from the end of the year or early next year.

The FOMC meetings for the second half of this year are scheduled for September and November. Some also anticipate that the Fed's stance on tapering will be announced at the Jackson Hole meeting held in August.

Currently, the Fed is purchasing $120 billion worth of Treasury bonds and mortgage-backed securities (MBS) monthly. However, the expansion of COVID-19 vaccine distribution and the resumption of economic activities have led to soaring inflation and employment recovery, strengthening arguments that the Fed should proceed with tapering.

The market estimates that the Consumer Price Index (CPI) for May, to be released on the 10th, will rise by 4.7% year-over-year. This suggests a larger increase compared to the previous month's CPI rise of 4.2%.

Wall Street investment banks had predicted that the Fed would not make an early tapering decision following the below-expectation May employment data release, but inflationary pressures are seen as a factor that could change the Fed's stance.

At least five Fed officials, including Patrick Harker, President of the Philadelphia Federal Reserve Bank, Robert Kaplan, President of the Dallas Fed, Loretta Mester, President of the Cleveland Fed, and Fed Vice Chair Randal Quarles, have already advocated for tapering.

Although Fed Chair Jerome Powell has consistently stated that tapering is premature, analysis suggests that the situation is forming where tapering discussions at this FOMC meeting are inevitable.

CNBC understands that the Fed is trying to clearly convey the message that interest rate hikes will only be possible after completing the tapering process this time, based on the view that the tightening tantrum during the 2013 quantitative easing reduction stemmed from the market's failure to distinguish the 'timetable' between asset purchase tapering and interest rate hikes.

Despite growing inflation concerns, the U.S. 10-year Treasury yield remained steady at 1.57% on the day. Although Treasury Secretary Janet Yellen stated that interest rate hikes would also benefit the U.S., the market showed little reaction.