The shadow of austerity that approaches little by little… March FOMC general reorganization [김영필의 3분 월스트리트]

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Again, it wasn’t much different from Wall Street’s expectations. Jerome Powell, chairman of the Federal Reserve (Fed), has decided to freeze the current zero interest rate and maintain the pace of asset purchases. The stock market rose in anticipation of continuing easing monetary policy.

Of course, the outlook for economic growth has risen and inflation forecasts have jumped. Nevertheless, it is said that there will be no rate hike until the end of 2023. The 10-year Treasury bond rate, which rose to 1.68% a year on that day, declined after Powell’s press conference, fell to the 1.62% level, and then rose to the 1.64% level. Let’s summarize the contents of the Federal Open Markets Commission (FOMC) for March.

First of all, the five things to be aware of in today’s FOMC are as follows.

① Zero interest rate and monthly asset purchase of USD 120 billion, no operation twist

② This year’s gross domestic product (GDP) growth rate was 6.5%, the core PCE was 2.2%, and the unemployment rate was 4.5%.

③ No rate hike until the end of 2023, only when both employment and inflation indicators are satisfied

④ In fact, I don’t care about the increase in government bond yields.

⑤ Large uncertainty over the next 2-3 years

Chairman Powell admitted that the game is improving on the day. He said, “The economic recovery has progressed faster than normal forecasts, and the FOMC members have revised their economic forecasts significantly higher than they expected in December last year,” he said. “FOMC participants expect the unemployment rate to continue to decline,” he said.

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This is also revealed in numbers. Looking at the economic forecasts distributed by the Fed that day, this year’s GDP growth rate was 6.5%, up 2.3 percentage points from last December’s forecast (4.2%). The unemployment rate went down from 5.0% to 4.5%. The core personal consumption expenditure (PCE) inflation, which the Fed primarily references in its policy, was 2.2%, up 0.4 percentage points from the previous year. It comes out above the Fed’s target of 2%.

This is mainly due to a decrease in patients with novel coronavirus infection (Corona 19) and an increase in vaccination. Chairman Powell also said, “Vaccination gives hope to return to a more normal life than at the end of this year.”

Nevertheless, the easing monetary policy will continue for the time being. Chairman Powell said, “The economic recovery is uneven, and there is still a long way to go.” “Economic as a whole, employment is 9.5 million fewer than before the pandemic.”

However, there are no additional mitigation measures. When asked about the Operation Twist, Chairman Powell made it clear that he did not intend to take further action, saying, “I think the monetary policy is appropriate.”

This is equivalent to not paying attention to rising government bond yields. As I mentioned in the’Three Minute Wall Street’, the Fed is saying that unless there is a sudden surge in interest rates or a credit crunch, the Fed sees a rise in government bond yields as a good sign of an economic recovery and will leave it alone.

If you come this far, you have a question. If you look at the Fed’s dot plot, there will be no rate hike until the end of 2023.

But right now, this year’s core PCE inflation breaks through 2%. Chairman Powell said, “Inflation will increase over the next few months, and in addition to this base effect, the resumption of economic activity could lead to higher prices.” We’ve mentioned in more detail and longer than before that inflation could come.

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Instead, Mr. Powell made it clear that in order for interest rate hikes to occur, we need to confirm post-mortem numbers that both employment and inflation were satisfied. I emphasized more than before. “We see a wide range of employment indicators as well as unemployment, and inflation should be above 2% for a while, not temporary,” he said.

Now let’s look at them one by one. Looking at the economic forecasts released today, the unemployment rate will drop from 4.5% this year to 3.9% in 2022 and 3.5% in 2023. The core PCE fell to 2.2% this year, 2.0% in 2022, and 2.1% in 2023, and then rises again.

The unemployment rate, which was at the level of full employment before Corona 19, is 3.5%. It is 2023 when we reach this level The core PCE will exceed 2.0% from this year, but the unemployment rate, which is one of the two links, is that, as expected, it will not meet the conditions for an interest rate hike by 2023. Here, Chairman Powell said, “It’s not just about the unemployment rate.”

In this way, it is understandable why so many commissioners said there would be no rate hike until the end of 2023.

What’s important is that Chairman Powell’s words and the economic outlook for this day are based on the current point of view. In other words, expectations can change over time. At this point, believe in Chairman Powell’s words, but keep an eye out for changes, knowing that things can change at any time. On this day, when asked if Chairman Powell could discuss tapering, he said “No yet,” but this is not for the time being, not indefinitely.

There is a part that Chairman Powell said on the day that “there is a lot of uncertainty over two to three years,” which is also a basis for easing monetary policy, but it should be kept in mind that it can be interpreted to mean that the economy could improve faster. Do it. Uncertainty doesn’t necessarily mean decline. Because you don’t know what’s going to happen, there’s a chance you’ll get better sooner.

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Looking at the actual dot plot, there were 5 people who predicted an interest rate hike in 2023 in December of last year, but this time it has increased to 7 people. There are still many (11) expecting zero interest rates, so there seems to be no rate hike at this time, but anyway, the number of people in the interest rate hike side is increasing. In the case of 2022, in December of last year, there was one prediction of an interest rate hike, but this time it was four.

The improving economic outlook itself is a sign that austerity and interest rate hikes are approaching. The fact that the operation was not twisted despite the strong demands of the market may be the result of taking into account the fact that if the purchase of long-term bonds is expanded, there is an additional economic stimulus effect. Tightening is approaching, and there is no need to further loosen it.

The fact that Chairman Powell said the asset price is definitely high is something to be heard carefully. The stock market won’t fall at this remark, but I have to see that the Fed is keeping its eyes on tightening.

Eventually, the announcement of the next economic outlook (June) became important. If inflation peaks in May, there will be more controversy. As Chairman Powell said he would not care about the yield of government bonds, the interest rate would rise further. We will continue to observe trends in various indicators, stock markets, and government bond yields.

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/New York = Correspondent Kim Young-pil [email protected]

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