[FOMC] Giant Step in July Too?…Powell "Committed to Bringing Inflation Back to 2%"

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] Once again, is it a ‘Giant Step’ (0.75 percentage point rate hike) or a consecutive ‘Big Step’ (0.5 percentage point hike)?

For the U.S. central bank, the Federal Reserve (Fed), to reach the year-end interest rate forecast of 3.4%, additional giant steps or consecutive big steps are inevitable. The Fed, which misjudged last year’s inflation as a ‘temporary phenomenon’ and worsened the problem, is now widely regarded as having declared a full-scale war as an ‘inflation fighter.’

◇"We will control inflation" Possibility of a Giant Step in July

The Fed’s strong commitment to price stability is evident from the policy statement released immediately after the Federal Open Market Committee (FOMC) regular meeting on the 15th (local time). Along with the decision to raise rates by 0.75 percentage points, a new phrase was added stating that it is "strongly committed" to returning inflation to the 2% target. Meanwhile, the phrase "expecting inflation to return to the 2% target and the labor market to remain strong through appropriate monetary policy" was removed.

Fed Chair Jerome Powell also began the press conference by saying, "We have the means and determination to control inflation." He confirmed that the reason for choosing a giant step instead of the previously anticipated big step was due to the noticeably rising May Consumer Price Index (CPI) and inflation expectations data recently released. In this meeting, the first giant step since 1994, only one out of eleven members voted against it.

It is rare in the past decade for the Fed to change policy decisions after reviewing data during the blackout period, as happened this time. Powell said, "A 0.75 percentage point increase is an uncommon measure. It will not happen easily." However, he also warned that unless inflation indicators ease, a 0.5 or 0.75 percentage point hike could occur again at the July FOMC.

The dot plot released that day shows the year-end rate at 3.4%, which requires a total increase of 1.75 percentage points over the remaining four meetings. Current forecasts from major investment banks are largely divided into two scenarios: ▲Giant Step - Big Step - Baby Step - Baby Step or ▲Big Step - Big Step - Big Step - Baby Step. In these cases, the year-end rate would be between 3.25% and 3.50%.

Investment bank Goldman Sachs expects "a 0.75 percentage point hike in July, a 0.5 percentage point hike in September, and 0.25 percentage point hikes in November and December." Citi also noted the Fed’s upward revision of the core inflation forecast to 4.3% by year-end and predicted "another 0.75 percentage point hike is possible in July." Analysts believe the Fed will continue raising rates until reaching 4%. Morgan Stanley also estimated that the year-end benchmark rate will approach 4%.

On the other hand, Barclays sees a 0.5 percentage point hike as likely at the July FOMC, citing recent U.S. consumption slowdown and housing price weakness due to rising mortgage rates. USB stated, "Through the hawkish dot plot, we confirmed the Fed’s determination to raise rates to control inflation even if growth slows," but added, "Additional 0.75 percentage point hikes are uncertain."

◇Concerns over recession spread amid ultra-fast tightening

The problem lies in concerns over recession due to ultra-fast rate hikes. Economic media CNBC analyzed that the speed of these rate hikes is similar to that during the stagflation period following the oil shock in 1981.

These concerns are also reflected in the economic outlook released by the Fed. The U.S. Gross Domestic Product (GDP) growth rate for this year was downgraded by 1.1 percentage points to 1.7%. However, Chair Powell, while acknowledging it is "not easy," still expressed confidence in a soft landing for the economy. He said, "Despite facing significant challenges in recent months, I believe a soft landing is possible." He added that recent U.S. consumer spending remains strong and diagnosed, "There are currently no signs of an impending recession."

The speed of the Fed’s tightening, which influences global monetary policy, is expected to deepen the concerns of major central banks. There is also a high possibility of capital outflows from emerging markets. The Washington Post (WP) reported, "It could cool the economy too much, triggering waves of recession and layoffs."

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