[FOMC] "US Interest Rates May Rise in March" - Market Plummets After Powell's Remark

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina, Reporters Lee Seon-ae and Moon Je-won] The U.S. central bank, the Federal Reserve (Fed), indicated a rate hike in March. Fed Chair Jerome Powell did not rule out the possibility of raising rates at every meeting going forward, potentially up to 6 to 7 times within the year. The Fed also clarified the principles of quantitative tightening to follow after the rate hikes.

Following Powell's hawkish remarks, the Korean stock market could not avoid a sharp decline after the New York stock market fell. The KOSPI dropped more than 2%, retreating to the 2650 level. This is about a 20% decline from the peak in July last year, signaling an entry into a bear market. Due to the strong dollar, the won-dollar exchange rate also surpassed the 1200 won mark, attempting to reclaim a short-term high.

In a statement released immediately after the two-day Federal Open Market Committee (FOMC) regular meeting held through the 26th (local time), the Fed said, "Inflation is well above the 2% target, and the labor market remains strong, so it is appropriate to raise the target range for the federal funds rate 'soon.'"

This effectively signals that rate hikes will begin from March, when the ongoing tapering (asset purchase reduction) is expected to end. This would be the first rate hike since December 2018.

Chairman Powell also confirmed at the press conference, "We will discuss whether to raise rates at the March meeting," adding, "We may raise rates depending on the situation." He revealed a more pronounced hawkish stance than expected, saying, "There is quite a bit of room to raise rates without threatening the labor market."

When asked about the possibility of rate hikes at all remaining FOMC meetings this year, he left room by stating, "We will navigate the current situation with dual risks humbly and nimbly." He did not rule out the possibility of raising rates by 0.5 percentage points instead of the usual 0.25 percentage points at once.

On the same day, the Fed separately released a statement outlining the principle of reducing the balance sheet after starting rate hikes. The plan is to reduce holdings by adjusting the reinvestment amount of principal repayments from securities held. Bank of America (BoA) evaluated that "the announcement of the balance sheet reduction principle signals that the decision to start quantitative tightening is imminent."

Until just before the press conference, the New York stock market had been showing strength but sharply froze following Powell's hawkish remarks. On that day, the Dow Jones Industrial Average and the S&P 500 closed down 0.38% and 0.15%, respectively, compared to the previous session. The U.S. 10-year Treasury yield surged to 1.86%, and the dollar also strengthened.

On the 27th, in the Korean stock market, foreigners sold more than 1 trillion won net, pulling the market down. The KOSPI, which had fallen to the low 2700s the previous day, dropping below the lower end of securities firms' early-year forecasts, fell more than 2% that day, retreating to the 2650 level. The KOSDAQ also dropped more than 2%, sinking to the 850 level.