US 'Surprise' Inflation... Will the Fed Accelerate Interest Rate Hikes?

Samsung Securities Forecasts First Interest Rate Hike in Q3 Next Year

[Asia Economy Reporter Ji Yeon-jin] Last month, the US Consumer Price Index (CPI) surged, raising expectations that the timing of interest rate hikes could come sooner than anticipated.

According to Samsung Securities on the 13th, the US Federal Reserve (Fed) is expected to raise interest rates once each in the third and fourth quarters of next year as the point of inflation stabilization is delayed. Jinwook Heo, a researcher at Samsung Securities, said, "This is considered an insurance rate hike for risk management purposes," adding, "Therefore, the interest rate hike cycle after confirming inflation stabilization in 2023 will proceed very gradually, with two hikes per year."

Previously, the US recorded a surprise CPI of 6.2% in October. It is analyzed that the inflationary pressure, which had eased in August and September due to the spread of the Delta variant, intensified again last month as the reopening effect was reproduced. In addition to the sharp rise in energy and automobile prices, various inflationary factors such as increased service prices due to worsening labor shortages and rising housing costs are believed to have acted in combination.

Because of this, the US core PCE inflation is expected to peak at 4.2% in the fourth quarter of this year, then record 4.1% in the first quarter, 3.1% in the second quarter, 2.6% in the third quarter, and 2.4% in the fourth quarter of next year. The point at which core inflation stabilizes below 2.5% has been postponed from the originally expected second quarter to the fourth quarter of next year.

The point of inflation stabilization is considered a key variable for the Fed’s first interest rate hike. Fed Chair Jerome Powell stated, "With inflation significantly exceeding the target level and two of the three conditions for rate hikes (forward guidance) already met, the first rate hike is possible once full employment is achieved."

The US unemployment rate is expected to fall below the full employment level of 4% during the third quarter of next year, and since inflation will remain above 2.5% at the time full employment is reached, the timing of the first rate hike is expected to be moved forward from January 2023 to the third quarter of next year. Researcher Heo said, "While hikes in September and December next year are the baseline, if tapering accelerates, they could be moved up to July and November," adding, "From the financial market perspective, what is more important is the nature of the Fed’s rate hike cycle. Next year’s hikes will be insurance rate hikes for risk management in preparation for inflation lasting longer than expected." This is in the same context as the three insurance rate cuts made in the second half of 2019 due to economic slowdowns in China and the Eurozone.

He said, "After inflation normalizes to the low 2% range from the end of next year, the number of rate hikes in 2023 will be two (one per half-year), proceeding very gradually at half the pace of the hikes in 2017-2018."

This content was produced with the assistance of AI translation services.