Samsung Securities "Fed to Take Consecutive Giant Steps in June and July"

US Interest Rates Expected to Rise to Around 3.5% by the End of This Year

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] The U.S. Federal Reserve (Fed) is expected to take consecutive 'Giant Steps' (raising the benchmark interest rate by 75 basis points at once) in June and July. It is analyzed that in September, the Fed will implement a 'Big Step' (raising the benchmark interest rate by 50 basis points), followed by 25 basis point increases in November and December, raising the benchmark interest rate to around 3.5% by the end of the year.

According to the Wall Street Journal (WSJ) on the 14th (local time), the Fed is reportedly considering a 75 basis point rate hike at this month's FOMC meeting. Although the WSJ mentioned in a report the day before that the possibility of a rate hike was low despite the higher-than-expected May Consumer Price Index (CPI), it soon changed its stance. Jinwook Heo, a researcher at Samsung Securities, explained, "Such reports are implicitly used as a channel to convey the FOMC's intentions for the June meeting this week," adding, "This kind of communication method has occasionally been used in the past."

The direct trigger for the Fed's change in stance, which previously ruled out a Giant Step, was the May CPI surprise announced last Friday. Concerns that the inflation peak might be delayed until the second half of the year and the broader-than-expected spread of price pressures raised worries that the pace of CPI slowdown could be slower than anticipated. The long-term inflation expectation from the University of Michigan for May, which rose to 3.3%, the highest since 2008, also appears to have played a significant role in accelerating the pace of rate hikes.

Researcher Jinwook Heo stated, "Consecutive 75 basis point hikes are expected in June and July, followed by a 50 basis point increase in September, and 25 basis point hikes in November and December, pushing the rate up to 3.5%," adding, "While there is still a possibility that the rate hike cycle will continue into next year, the basic scenario is that it will conclude at 3.5% by the end of this year." Initially, it was forecasted that the Fed would raise rates by 50 basis points until November and then by 25 basis points in December and March next year, but both the speed and magnitude of increases have grown.

The probability of a U.S. recession starting next year has increased to 40%. If the Fed's future rate hikes exceed 3.5%, the likelihood of a recession is expected to rise further. Researcher Heo analyzed, "The final level of Fed rate hikes reflected in the futures market just 2 to 3 days after the May CPI announcement was sharply revised upward to around 4.0% by early next year," adding, "Since this includes three consecutive 75 basis point hikes, even if a 75 basis point hike occurs at this month's FOMC, the additional shock will not be significant."

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