On Friday, US Federal Reserve Chairman Jerome Powell reiterated in a virtual speech to the annual symposium in Jackson Hole, Wyoming, that the US central bank is planning to begin tapering its bond purchases by the end of the year, offering no specific timetable, but saying that the plan would depend on the US labor market situation and the spread of the Delta variant of SARS-CoV-2.
Powell said that he did not expect a near-term increase in the central bank’s benchmark interest rates, which stand at between zero and 0.25 percent, any time soon. He also cautioned that the winding down of the Fed’s bond-buying program should not be interpreted as a sign that rate increases would follow soon.
It was a pretty dovish speech, as Powell mostly repeated the minutes of a US Federal Open Market Committee meeting last month at which most Fed officials said that the monthly purchases of US$120 billion of US Treasury and mortgage-backed bonds should be reduced before the end of the year.
Nonetheless, Powell’s remarks suggested that he might want to give himself leeway to digest further data before normalizing the Fed’s monetary policy.
Following his closely watched speech, central banks around the world, including in Taipei, were likely relieved that the Fed would not move immediately or unexpectedly in unwinding its ultra-loose monetary policies, allowing them to withdraw their own quantitative easing measures as scheduled.
At the same time, investors did not have to worry about an abrupt change in the Fed’s policy potentially stirring near-term volatility in the financial markets.
After all, Powell walked a fine line by confirming the open market committee’s position on bond buying, but also highlighting that the low-interest rate environment would be unaffected by such a move.
However, not all central banks will follow the Fed’s policy in keeping their monetary policies unchanged, as governments around the world are increasingly adapting their COVID-19 stimulus policies as economies show signs of overheating.
The central banks in the UK and Canada, for instance, began to slow bond-buying programs early this year, while several Latin American countries have raised their interest rates to cope with imported inflation. The Bank of Korea on Thursday became the first Asian central bank to tighten its monetary policy during the COVID-19 pandemic, as it raised its repo rate by 25 basis points to 0.75 percent.
Other Asian central banks might not follow Seoul’s example in the near term, as financial imbalance concerns were the main reason behind the South Korean central bank’s move.
In Taipei, the central bank is likely to keep its policy rates unchanged at a board members’ meeting next month, with central bank Governor Yang Chin-long (楊金龍) on Wednesday saying that there is no urgency to raise rates. Apart from a mild and benign inflationary pressure, the central bank’s steady-handed policy is also supported by the uneven growth in Taiwan’s export-oriented and domestic demand-reliant sectors, Yang said.
Most Asian central banks are concerned about an economic slowdown due to COVID-19 outbreaks, the pace of capital flows and inflation pressure, while fears of Taiwan potentially being once again listed on the US Department of the Treasury’s foreign exchange watch list this year creates an additional headache for central bankers in Taipei, especially considering the robust growth momentum of Taiwanese exports over the past few months.
However, regardless of whether Taiwan would once again be listed on the US foreign exchange policy report, the central bank must remain vigilant and ready to employ monetary responses to keep prices stable and rein in inflation.
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