"Final Interest Rate of 4.5% in Q1 Next Year"... Market Already Reflecting It

Final Interest Rate Outlook Continues to Rise
US Core CPI Expected to Exceed Forecast... Inflation Expected to Persist
75bp Increase at September FOMC Confirmed

September FOMC Outlook and Subsequent Dot Plot Expectations (Photo by Meritz Securities Research Center and Bloomberg)

[Asia Economy Reporter Yoonju Hwang] The market is pricing in a terminal rate of around 4.5% for interest rate hikes. The terminal rate refers to the final interest rate in the Federal Reserve's (Fed) rate hike cycle. While there is no disagreement on the end point of tightening (2023), forecasts for the terminal rate continue to rise. This is interpreted as reflecting concerns that inflation may persist for some time, as the rent component of the U.S. core Consumer Price Index (CPI) for August recorded the highest increase this year.

On the 19th, Shin Jungho, a researcher at Ebest Investment & Securities, stated, "According to Bloomberg, the FOMC is expected to raise the benchmark interest rate at every meeting this year (September, November, December) and at the May meeting next year."

Researcher Shin explained, "The core CPI for August, excluding the highly volatile energy and food sectors, rose again, particularly influenced by the sharp increase in rent, which has a significant impact on prices."

The U.S. core CPI for August rose 6.3% compared to the same period last year. This figure exceeds both the market expectation (6.0%) and last month's figure (5.9%). Compared to the previous month, it increased by 0.6%, also surpassing the expected rate (0.3%) and last month's number.

Looking at the details, housing costs such as rent surged by 0.7%, and food (0.8%) also maintained its rising trend. Rent has never surged this sharply this year. Rent, along with wages, is one of the factors continuously driving inflation, which has heightened market concerns.

Researcher Shin said, "The pressure on housing costs is currently passing through the period with the highest year-over-year increase in inflation for the third quarter," adding, "The market is currently pricing in a level that exceeds the fear of tightening, reflecting a 200 basis points (2% point increase) scenario in advance."

[Image source=Yonhap News]

The securities industry unanimously agrees that attention should be paid to the uncertainty surrounding the terminal rate. Minyoung Park, a researcher at Shinhan Financial Investment, also pointed out, "Before the inflation announcement, the terminal benchmark rate was expected to be around 4.00~4.25%, but currently, the probability of an increase above 4.75% by March next year is about 50%."

Jina Kim, a researcher at Eugene Investment & Securities, emphasized, "The key points to watch at the September FOMC are the terminal rate level and the dot plot for 2024 and beyond." Researcher Kim predicted, "The dot plot will raise the upper bound of the benchmark rate to 4% by the end of this year and the terminal rate to 4.25~4.50% next year."

Sanghyun Park, a researcher at Hi Investment & Securities, also analyzed, "The focus is not on the additional rate hike size at the September FOMC meeting but on the Fed's future policy direction," adding, "Considering the price pressures confirmed in the August core CPI, it is highly likely that the Fed officials' rate forecasts will be revised upward."

Researcher Park added, "Whether the median benchmark rate at the end of this year in the September dot plot exceeds 4% and how much the 2023 median will be revised upward will be important variables that influence market concerns."

The 'dot plot' is considered an important clue that not only shows the terminal rate level that Fed officials are thinking of but also allows for forecasting the additional rate hikes in the remaining two FOMC meetings of the year.

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