Fed Officials Support Tapering This Year but Draw the Line at Rate Hikes
Hawkish Members Resign One After Another... Early Rate Hike Impact Expected
Robert Kaplan, President of the Dallas Fed, who announced his resignation next month [Photo by Reuters Yonhap News]
[Asia Economy New York=Correspondent Baek Jong-min] U.S. Treasury yields rose intraday to 1.5%. Analysts say there is a high possibility of further increases as senior Federal Reserve (Fed) officials have consecutively supported tapering asset purchases within this year.
While Fed senior officials have voiced caution about early rate hikes, the consecutive retirements of members classified as hawks are expected to become a variable in monetary policy.
On the 27th (local time), the yield on the 10-year U.S. Treasury bond surpassed 1.5% intraday. The 10-year Treasury yield rising to 1.51% is the first time in three months. The 30-year Treasury yield also exceeded 2% for the first time since mid-July, highlighting a notable trend of bond selling. The rise in U.S. Treasury yields led to a stronger dollar. The dollar index rose 0.1% that day.
Treasury yields have been rising daily since the Fed made the November tapering announcement a foregone conclusion and revealed through the dot plot that about half of the members expect rate hikes by the end of next year. Daniel Shay, Director at Simpler Trading, predicted, "If the 10-year Treasury yield breaks the resistance level, it could rise to as high as 1.7%."
Fed senior officials who spoke that day unanimously supported the implementation of tapering but expressed negative opinions regarding rate hikes next year. Lael Brainard, a Fed Governor mentioned as a candidate for the next Fed Chair, said that tapering conditions would be met within this year but added, "The Fed's maximum employment and average inflation goals for rate hikes are much higher than those for tapering."
She stated, "I want to emphasize that the tapering decision cannot be taken as any signal for rate hikes." The Wall Street Journal reported that Brainard warned against hastily deciding on rate hikes.
John Williams, President of the Federal Reserve Bank of New York, also said, "There is still a long way to go to reach full employment. Over time, it will become clearer whether the 2% inflation target has been achieved," indicating his disagreement with early rate hikes.
The dot plot released by the Fed this month showed that 9 out of 18 members forecast rate hikes next year, but changes are possible.
Eric Rosengren, President of the Boston Fed, and Robert Kaplan, President of the Dallas Fed, who resigned amid a stock trading conflict of interest controversy that day, were both hawks demanding normalization of monetary policy. They were scheduled to have voting rights in the Federal Open Market Committee (FOMC) in 2022 and 2023, respectively.
Considering the vacancies left by the hawkish officials and the current open Fed Governor positions, as well as the retirement of Fed Vice Chair Randal Quarles, it is highly likely that officials supporting accommodative monetary policy will constitute the majority of the Fed.
Krishna Guha, an analyst at Evercore ISI, also analyzed, "The resignations of the two Fed presidents removed two of the nine hawks hoping for rate hikes in 2022."
The New York Times noted the timing of the two presidents' resignations before Fed Chair Powell's Senate Banking Committee hearing scheduled the next day. The Times pointed out that if they had not resigned, it could have posed an obstacle to Powell's reappointment.
In his opening remarks released ahead of the hearing, Chair Powell stated, "Inflation will remain elevated but will eventually decline," and added, "If inflation does not stop rising, we will respond with rate hikes."
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