Fed Signals Tapering Within the Year... Growing Possibility of Interest Rate Hike Next Year

Powell "No Impact of Evergrande Crisis on US Banks"
New York Stock Market Rises and Treasury Yields Fall Amid Dovish Assessment

[Image source=Reuters Yonhap News]

[Asia Economy New York=Correspondent Baek Jong-min] The U.S. Federal Reserve (Fed) has announced the start of asset purchase tapering within this year. Regarding the timing of interest rate hikes, half of the Fed officials pointed to next year, increasing the possibility of an earlier rate hike. The market evaluated that the Fed is still pursuing an accommodative policy, and the New York stock market showed a broad rally.

On the 22nd (local time), the Fed announced a freeze on the benchmark interest rate following the Federal Open Market Committee (FOMC) meeting. The Fed further stated, "If economic growth broadly continues as expected, a slowing of asset purchases could soon be justified."

The Wall Street Journal interpreted this as a signal that tapering will be decided at the November FOMC meeting.

Fed Chair Jerome Powell also mentioned at the press conference that employment indicators for tapering seem to have already been met, and Fed officials have reached a consensus that tapering should be completed by mid-next year.

However, Chair Powell emphasized that tapering is not a direct signal for an interest rate hike. The dot plot released separately on the same day revealed that half of the 18 Fed officials support a rate hike next year, advancing the previously twice-announced 2023 timetable from June. Nonetheless, Powell appeared cautious about raising rates.

Although there remains disagreement among Fed officials regarding the timing of rate hikes, a major foreign media outlet reported that the Fed sent the strongest signal yet that it will reduce its economic stimulus program within this year.

The Fed's economic outlook data is cited as the reason for the change in officials' positions. The Fed's forecast for this year's economic growth rate was lowered to 5.9%, down 1.1 percentage points from 7% in June. The Fed raised its inflation forecast for this year to 3.7%, up 0.7 percentage points from the 3% forecast in June. The Fed also revised next year's inflation forecast upward from 2.1% to 2.3%.

The Fed's announcement and Chair Powell's remarks on this day were evaluated by the market as dispelling concerns that the Fed might accelerate monetary policy normalization.

Rich Duazon, portfolio manager at Capital Group, explained, "The Fed's stance on rate hikes remains dovish."

Chair Powell also sought to reassure investors amid the global financial market turmoil caused by the bankruptcy crisis of China's Evergrande Group. At the press conference, Powell assessed, "The Evergrande crisis is a problem within China and will not spill over to U.S. banks."

He also mentioned that a report on the issuance of a digital dollar at the Fed level will be released soon, but no decisions have been made yet.

Powell did not respond to questions about whether he had received any indication from the White House regarding his reappointment.

Despite the announcement of asset purchase tapering within the year and the possibility of rate hikes, there was no market panic. After the Fed's announcement, major indices on the New York stock market closed with gains of about 1%. U.S. Treasury yields fell to 1.306%. Although bond yields declined, the dollar closed stronger, supported by the tapering announcement.