“The outlook for easing inflation in the second half of the year collapses as US inflation rises above 7% for three months in a row”
0.5%p increase observed at FOMC in May
“The Fed is already expecting an aggressive rate hike.” Most of the stock markets such as the KOSPI rose
Federal Reserve (Fed) Chairman Jerome Powell has hinted that the key interest rate might be raised by 0.5 percentage points at a time, rather than the usual 0.25 percentage point increase, to block inflation risks. Although concerns regarding a global economic slowdown are growing due to the war in Ukraine, he emphasized that the priority is to stop the surge in US consumer prices, which has risen to the highest level in 40 years.
○ “If necessary, increase by 0.5% point”
“The labor market is very strong and inflation is too high,” Powell said in a speech at the National Association of Real Economy (NABE) on the 21st (local time). He said, “If it is judged that it is necessary to raise the interest rate by more than 0.25 percentage points in one or several meetings, we will do so,” he said, suggesting a ‘big step’, meaning a 0.5 percentage point increase. In a question-and-answer session following the speech, he directly emphasized, “If a 0.5 percentage point increase is necessary, we are willing to do it more than once.”
The Fed lowered its benchmark interest rate to ‘zero’ in March 2020 to stimulate the economy, at the beginning of the spread of the novel coronavirus (COVID-19). On the 16th of this month, the Federal Open Market Committee (FOMC), which decides monetary policy, raised interest rates by 0.25 percentage points, breaking out of zero interest rates for the first time in two years. Since then, Wall Street has discussed the possibility of the Fed raising interest rates by 0.25 percentage points each time at the remaining six FOMC meetings this year, but Chairman Powell announced on the same day that he would raise rates more aggressively.
This is believed to be due to the judgment that the rise in consumer prices, which has exceeded the Fed’s inflation target of 2%, is much more serious than expected. The US consumer price index has been rising by 7% for three months in a row from December last year to February this year. Chairman Powell also worried, “There was a forecast that inflation would peak in the first quarter of this year (January to March) and ease from the second half, but this is collapsing.”
According to FedWatch of the Chicago Mercantile Exchange (CME), which predicts monetary policy through interest rate futures, the market is weighing on the possibility of a 0.5 percentage point hike at the FOMC in May. As of 00:00 (Eastern Time) on the 22nd, at the FOMC in May, there is a 64% chance that the interest rate will rise by 0.5 percentage points, which is regarding twice the probability of a 0.25 percentage point increase (36%).
○ 22nd 亞 Stock market rise vs currency fall
On the 21st, the Dow Jones Industrial Average fell 0.6% from the previous day, following the remarks of Chairman Powell. On the other hand, stock markets in major Asian countries rose on the 22nd.
The Korean KOSPI rose 0.89% (23.95 points) to 2,710.00 on the day, recovering to the 2,700 level. Institutional investors bought more than 280 billion won, leading the uptrend. Japan’s Nikkei Average (1.48%) and Hong Kong’s H Index (4.06%) also rose relatively large. China’s Shanghai Composite Index (0.19%) also rose. Ji-young Han, a researcher at Kiwoom Securities, said, “Chairman Powell’s remarks were hawkish, but there is no big difference from what he said at the FOMC on the 16th.”
However, all major Asian currencies fell once morest the US dollar. The won-dollar exchange rate ended at 1218.1 won, up 1.8 won from the previous day (the won’s depreciation). The Japanese yen fell to its lowest level in six years and one month since February 2016. On that day, the yen-dollar exchange rate in the Tokyo foreign exchange market rose to 120.35 yen during the day, surpassing the 120 yen level for the first time in six years and one month.
New York = Correspondent Yoo Jae-dong jarrett@donga.com
Tokyo = Correspondent Lee Sang-hoon sanghun@donga.com
Reporter Kim Ja-hyun zion37@donga.com
