[Super Tightening Era] Prices Went Crazy, Super Tightening Accelerates

[Asia Economy New York=Special Correspondent Joselgina, Reporter Mun Jewon] An era of ultra-tightening is coming. Inflation in the United States, which was expected to ease somewhat, is proving difficult to control, raising concerns that a ‘Super Tightening’?simultaneous interest rate hikes and quantitative tightening?will accelerate.

The three major indices of the New York Stock Exchange all closed lower on the 10th (local time) following the release of the January Consumer Price Index (CPI), which recorded the largest increase in 40 years, triggering heavy sell-offs. The Nasdaq Composite, which is sensitive to interest rates and tech stocks, fell 2.10% from the previous session. The Dow Jones Industrial Average dropped 1.47%, and the S&P 500 declined 1.81%.

This was due to the January CPI released that morning exceeding market expectations, spreading concerns about tightening. The January CPI surged 7.5% year-on-year, marking the largest increase since February 1982. Despite the Federal Reserve’s message to curb inflation by all means, the inflation rate rose more than in December last year, unsettling financial markets.

On the same day, the yield on the 10-year U.S. Treasury bond surpassed 2% for the first time since August 2019. Starting at 1.939%, the 10-year yield reached 2.05% during the session. The 2-year yield, which is sensitive to monetary policy, also exceeded 1.6%, hitting its highest level since December 2019. The increase on this day was the largest since June 5, 2009. Immediately after the CPI announcement, the probability of the Fed raising rates by 0.5 percentage points in March surged from 25% to over 90% in the federal funds futures market.

On Wall Street, voices are growing that the Fed is likely to take strong measures to curb soaring inflation. Capital Economics expressed concern, stating, "This inflation is due to rising energy prices, worsening supply chains, and increased demand," and added, "It will be difficult to stabilize in the short term." James Bullard, President of the Federal Reserve Bank of St. Louis and a prominent hawk within the Fed, argued that the benchmark interest rate should be raised by 1 percentage point by July to address inflation.

The U.S. inflation shock also unsettled the Korean market. On the same day, the Korean KOSPI opened with a decline of over 1%. In the Seoul foreign exchange market, the won-dollar exchange rate opened at 1,201 won, up 4.5 won from the previous day’s closing price.

The pace of U.S. tightening is considered a major variable for the global economy. Since 1980, most financial crises have occurred when the U.S. tightened monetary policy. If tightening proceeds more sharply than expected, asset market collapses and capital outflows could become visible in Korea as well.

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, at this year’s first expanded macroeconomic and financial meeting attended by Lee Ju-yeol, Governor of the Bank of Korea, Jeong Eun-bo, Chairman of the Financial Supervisory Service, and Do Kyu-sang, Vice Chairman of the Financial Services Commission, said, "Although this is a predictable risk, it is a crucial time to thoroughly prepare and manage so that it does not become a ‘White Swan’ caused by inadequate countermeasures," urging stable macroeconomic management and risk control.