Attention Focused on Next Week's FOMC... Key Points Include Quantitative Tightening

[Image source=Yonhap News]

[Asia Economy Reporter Junho Hwang] As the U.S. Federal Reserve is set to hold the Federal Open Market Committee (FOMC) meeting on the 27th, the securities industry is forecasting another giant step (0.75% rate hike) similar to last month. Although the peak of inflation has not been confirmed, considering the cautious opinions of Fed officials and the effects of quantitative tightening, it is expected that the Fed will not take an ultra step (1.00% rate hike).

On the 23rd, Ahn Yeha, a researcher at Kiwoom Securities, stated, "Although the peak of inflation has not been confirmed, considering the cautious attitude of Fed officials, a giant step is the most likely outcome."

He focused on the point where James Bullard, President of the Federal Reserve Bank of St. Louis, who plays a key role in this year’s Fed rate decisions, mentioned the neutral interest rate. President Bullard noted that since the FOMC views the neutral rate level at 2.5%, a 75 basis point increase has many advantages.

Researcher Ahn explained, "This can be interpreted as the Fed showing a cautious attitude toward raising rates at a faster pace than the current level," adding, "Rather than raising the policy rate by 100 basis points at once to 2.75%, surpassing the neutral rate of 2.5%, it can be interpreted as wanting to observe the effects after raising the policy rate to the neutral rate level."

Along with the base rate hike, attention must be paid to the effects of quantitative tightening, which plays a role in stabilizing inflation, to make a proper prediction about this FOMC meeting.

Jung Yongtaek, a researcher at IBK Investment & Securities, analyzed, "The U.S. Break-Even Inflation (BEI) declined after the Fed’s quantitative tightening," adding, "The shift from a net buying stance to net selling of Treasury Inflation-Protected Securities (TIPS) after April played an important role."

BEI is calculated by subtracting the TIPS yield from the nominal Treasury yield. During the pandemic, the Fed actively purchased TIPS, influencing TIPS yields and thereby affecting expected inflation. However, since April, the opposite movement has been observed, lowering expected inflation.

He explained, "Before and after the shift to net selling of U.S. TIPS, the liquidity premium flow of TIPS reversed direction, and this effect is reflected in inflation compensation," adding, "If quantitative tightening is reducing expected inflation, there seems to be no reason to overdo the size of the base rate hike."