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Powell says Fed will not raise rate on inflation fears alone

Lawmakers press Fed chief on inflation risk, jobs recovery

By Lee Min-hyung mhlee@koreatimes.co.kr

WASHINGTON (Reuters) — Federal Reserve Chair Jerome Powell reaffirmed Tuesday the U.S. central bank’s intent to encourage a “broad and inclusive” recovery of the job market, and not to raise interest rates too quickly based only on the fear of coming inflation. “We will not raise interest rates pre-emptively because we fear the possible onset of inflation. We will wait for evidence of actual inflation or other imbalances,” Powell said in a hearing before a U.S. House of Representatives panel.

Recent price increases have pushed the consumer price index to a 13-year high, prompting Republicans on the committee to offer charts detailing spikes in consumer items like bacon and used cars to suggest price increases are getting out of hand.

“We have unstable employment and higher inflation,” said Representative Jim Jordan, an Ohio Republican, referring to the Fed’s congressionally mandated goals of ensuring maximum employment and stable prices. “Something has to give.”

The recent high inflation readings, however, “don’t speak to a broadly tight economy” that would require higher interest rates, Powell said, referring to a “perfect storm” of rising demand for goods and services and bottlenecks in supplying them as the economy reopens from the pandemic.

Those price pressures should ease on their own, Powell said.

In setting upcoming monetary policy, the Fed chief pledged that the central bank would keep its eyes focused on a broad set of labor market statistics, including how different racial and other groups are faring.

“We will not just look at the headline numbers for unemployment,”

Powell told the members of the House Select Subcommittee on the Coronavirus Crisis. “We will look at all kinds of measures … That is the most important thing we can do” to ensure the benefits of the recovery are more fully shared.

Markets were little changed over the course of the hearing.

But the session, at times a sparring match between Democrats and Republicans over the Biden administration’s economic plans, hinted at the delicate line the Fed must walk in coming months as it balances inflation risks with its promise to ensure the economy recovers all the jobs lost after the onset of the coronavirus pandemic.

With U.S. Federal Reserve Chairman Jerome Powell toning down his recent hawkish rhetoric over his country’s monetary policy, economists said Wednesday the timing of a rate hike by the Bank of Korea (BOK) will be dependent on actual U.S. tapering moves.

The prediction is in response to Powell’s latest remarks, Tuesday (local time) that the Fed will not raise its key rate “preemptively” due to growing inflationary fears.

The message was delivered a few days after the Federal Open Market Committee (FOMC) turned hawkish last week when more of its members stressed the need to bring forward the timeline for a U.S. rate hike to 2022.

Given the BOK’s monetary policy direction is still heavily reliant on the U.S. economy, Powell’s remarks, interpreted by many as rather dovish, could serve as justification for the central bank to delay any rate hike decisions.

Following the latest BOK monetary policy board meeting last month, local economists predicted that the bank would raise the currently record-low benchmark rate at least once sometime in the fourth quarter of this year.

Experts said the BOK does not necessarily have to follow steps taken by the Fed as there is a certain degree of disparity over the post-pandemic economic recovery between the two countries.

“Powell’s recent remarks appear

to have the intention of minimizing the country’s stock market shock following the FOMC’s hawkish turn,” Yonsei University economist Sung Tae-yoon said. “The Korean economy will make progress in terms of face-to-face consumption in the latter half of the year, so my view is that the BOK does not have to follow in the footsteps of the Fed in its monetary policy.”

But he also did not leave out the possibility of the BOK carrying out an even earlier rate hike, as the economy remains vulnerable to inflationary fears.

“The central bank’s future monetary stance will rely on how much the economy will be exposed to inflationary risks.”

Korea University economist Kim Jin-ill said the BOK’s monetary policy should be adjusted in line with the timeline of the Fed’s tapering.

“Powell’s dovish messages

are aimed at toning down the ultra-hawkish stance from the latest FOMC meeting,” said Kim who has worked at the Federal Reserve Board.

“The timing for Korea’s benchmark rate hike should be determined in line with the schedule of the Fed’s possible tapering.”

Despite the FOMC’s hawkish shift, the Fed remains conservative in making official comments on talks about the timing for reducing the size of its bond-buying programs.

The BOK cut its benchmark rate to a record low of 0.5 percent in May last year amid the unexpected economic difficulties stemming from the COVID-19 pandemic. The Fed is also expected to keep maintaining its near-zero key rate policy at least until the first half of 2022.

Right after the FOMC delivered its hawkish message last week, the

market here expected the BOK’s monetary policy board to push for a rate hike as early as October, which, if realized, will mark the first rate increase by the central bank since November 2018.

U.S. stocks closed higher on Powell’s testimony before Congress. The Dow Jones Industrial Average rose 68 points, or 0.2 percent, to 33,945, Tuesday. The Nasdaq also closed up 0.79 percent at a record 14,253, on the rally of mega-cap tech stocks such as Amazon and Microsoft. The S&P 500 jumped 0.51 percent to close at 4,246 the same day.

The benchmark KOSPI also rose 0.38 percent Wednesday to close at 3,276.19, while the tech-savvy Kosdaq also finished with a gain of 0.48 percent at 1,016.46 the same day, as shown by data from the Korea Exchange (KRX), the country’s bourse operator.

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2021-06-24T07:00:00.0000000Z

2021-06-24T07:00:00.0000000Z

https://ktimes.pressreader.com/article/281487869315160

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