Fed Big Step, Next a Giant Step? ... What Will Powell Say Tomorrow?

[Asia Economy New York=Special Correspondent Joselgina] The big step has become a foregone conclusion. The next is the ‘Giant Step’.

There is a key question that Jerome Powell, chairman of the U.S. central bank Federal Reserve (Fed), will face at the press conference held immediately after the Federal Open Market Committee (FOMC) regular meeting on the 4th (local time), which decides monetary policy. It is whether the so-called ‘Giant Step,’ a 0.75 percentage point increase in the benchmark interest rate at once, can be considered.

The Fed, which has declared it will use all means to curb soaring inflation, is expected to implement a big step of raising interest rates by 0.5 percentage points for the first time in 22 years at this FOMC. The market is also closely watching Powell’s remarks, anticipating the possibility of a 0.75 percentage point hike at the June FOMC. Such a Giant Step has not occurred even once since 1994, when it was called the ‘bond market massacre.’

[Image source=Reuters Yonhap News]

◇Fed Taking a Big Step, What’s Next

According to the Chicago Mercantile Exchange (CME) FedWatch, on the 3rd (local time), the first day of the two-day FOMC regular meeting, the federal funds (FF) rate futures market reflected a 99.8% probability that the Fed will raise rates by 0.5 percentage points at this meeting. This is analyzed as a path virtually forecasted since Powell officially expressed support for a 0.5 percentage point hike last month. The Fed is also expected to specify quantitative tightening (QT), including balance sheet reduction, at this meeting.

The real market interest has shifted to the next step. The possibility of an additional 0.75 percentage point hike at the June meeting in the futures market surged from 80.4% a week ago to 99.8% on this day. Considering it was only 18.8% a month ago, this is a rapid hawkish shift.

Bank of America (BoA) said, "The most interesting moment at this press conference will be Powell’s answer on whether a 0.75 percentage point hike is on the table," adding, "What the market really cares about is the outlook for future hikes." DeMartino Booth, CEO of Quil Intelligence, also emphasized the significance of the Fed’s next move, saying, "The market already reflects a 0.5 percentage point hike at the May meeting."

◇"Medicine Should Be Taken All at Once"

Powell’s press conference scheduled for the afternoon of the 4th is expected to be somewhat hawkish. Tony Farron, Managing Director of Mischler Financial Group, said, "Powell is unlikely to support a 0.75 percentage point hike," but added, "He may say ‘we will discuss the possibility.’ He will not close the door on the possibility."

The last 0.75 percentage point hike was in 1994. It was a period when rapid rate hikes were implemented to the extent that the term ‘tightening massacre’ appeared. At that time, the Fed raised the benchmark interest rate from 3.0% to 6.0% within one year. The number of hikes was only seven, including one big step and one giant step each.

The Giant Step card, which was not mentioned just a month or two ago, has started gaining traction for the first time in about 30 years because the recent inflation trend is judged to be serious. Voices are growing that to curb inflation, a stronger tightening than expected must shock and frighten the market. This aligns with the argument of Jeremy Siegel, professor at the Wharton School of the University of Pennsylvania, who said, "Medicine should be taken all at once. It should not be taken in quarters (0.25 percentage points) at a time."

The number of U.S. retirees and corporate job openings released that day also hit record highs since statistics began, further fueling inflation concerns. The labor shortage in U.S. companies has reached its peak, putting upward pressure on already rising wages. The prolonged Ukraine war, China’s COVID-19 resurgence, and supply chain deterioration are also cited as factors driving inflation.

Morgan Stanley diagnosed, "Wage inflation is quite high," and said, "The Fed needs to tighten much more strongly than expected." Nomura Securities suggested the possibility of consecutive giant steps in June and July after the big step in May, saying, "To prevent the whirlpool of wages and prices, interest rates must be raised preemptively."

There is also analysis that the Fed may have already lost the opportunity for a soft landing of the economy due to errors in monetary policy judgment. As high inflation is confirmed not to be ‘transitory,’ market trust has already been damaged, which is expected to act as a risk in the future policy implementation process.

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