[Summary] Fed's 3 Consecutive Giant Steps... Powell Says "No Rate Cuts Before Controlling Inflation"

[Image source=AP Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] The U.S. central bank, the Federal Reserve (Fed), took three consecutive 'giant steps' (0.75 percentage point increases in the benchmark interest rate) to curb persistently high inflation. This marks the beginning of the '3% interest rate era' for the first time in 14 years.

Jerome Powell, the Fed Chair who led the high-intensity tightening, caught attention by using the phrase "will keep at it until the job is done," reminiscent of the title of former Fed Chair Paul Volcker's autobiography, 'Keeping At It.' This expression was also used earlier at the Jackson Hole forum. It clearly signals a commitment to respond in the Volcker style, rather than like Arthur Burns in the 1970s, who hesitated to raise rates amid recession fears and thereby fueled inflation.

◇ The U.S. Interest Rate Hits 3%... Reversal of Rate Order with Korea

On the 21st (local time), the Fed announced after the Federal Open Market Committee (FOMC) regular meeting that it would raise the federal funds rate by 0.75 percentage points from the previous 2.25?2.50% to 3.0?3.25%. This unprecedented three consecutive giant steps have pushed U.S. interest rates to their highest level since January 2008.

Jerome Powell, Fed Chair, said at a press conference immediately after the FOMC meeting, "We will not consider cutting rates until we are very confident that inflation is moving down toward the 2% target," confirming the policy of continued restrictive measures. Since entering the rate hike cycle in March this year, the Fed has raised rates by a total of 3.0 percentage points, including the recent three giant steps.

With the Fed's giant step on this day, the U.S. benchmark interest rate once again surpassed Korea's. After the Bank of Korea raised rates by 0.25 percentage points last month, the rates had been equal, but the gap widened again to 0.75 percentage points within a month. This is expected to inevitably impact our economy as well. If the interest rate reversal between Korea and the U.S. prolongs, concerns arise over foreign investor capital outflows and won depreciation. Moreover, won depreciation could increase the converted prices of imported goods, potentially fueling inflation.

◇ Will There Be a Fourth Consecutive Giant Step?

The Fed's giant step on this day had been anticipated early on. What surprised the market was not the size of the rate hike but the more hawkish-than-expected 'dot plot.' The median year-end rate was presented as 4.4%, implying the possibility of an additional 1?1.25 percentage point increase over the remaining two meetings.

Among the 19 FOMC participants, 9 projected year-end rates of 4.25?4.50%, and 8 projected 4.00?4.25%. Considering recent inflation concerns, this is interpreted as a signal for another giant step. To raise rates by an additional 1.25 percentage points within the year, the two scheduled FOMC meetings would need to raise rates by 0.75 percentage points and 0.5 percentage points respectively. If a 0.75 percentage point hike is decided at the November meeting, it would mark the fourth consecutive giant step.

Investment bank Morgan Stanley analyzed, "The year-end dot plot means that 0.75 percentage point in November and 0.5 percentage point in December are almost certain." Citibank also said, "The dot plot is more hawkish than expected," and revised its rate forecast upward, expecting hikes of 0.75 percentage points in November, 0.5 percentage points in December, and 0.25 percentage points in February, with the final rate reaching 4.5?4.75%.

However, if upcoming inflation data confirm a peak, the possibility cannot be ruled out that the hikes will be two big steps (0.5 percentage point increases) or a combination of giant and baby steps (0.25 percentage point increases), as suggested by eight participants.

◇ Final Rate in the 5% Range Next Year?

With continued high-intensity tightening, there is also a possibility that the final rate will reach 5% next year. Six FOMC participants projected year-end rates of 4.75?5%. Bank of America (BoA) also presented the same outlook.

In particular, Powell's statement that "we will not consider cutting rates until we are fully confident that inflation is moving down toward the 2% target" adds weight to the prospect of continued high-intensity tightening. He emphasized, "It is necessary to raise the policy stance to a restrictive level to exert meaningful downward pressure on inflation."

Moreover, Powell's use of the phrase 'keep at it' to express his tightening resolve is tantamount to invoking former Fed Chair Volcker, famous as an 'inflation fighter.' Like Volcker, who endured pain and continued harsh rate hikes up to the 22% range despite mounting recession fears and opposition, Powell confirmed his intention to endure hardship and maintain tightening policies. This clearly draws a line against market speculation about a possible slowdown and sends a message that he will take a different path from former Chair Arthur Burns.

Powell also acknowledged economic repercussions, saying, "The possibility of a soft landing may diminish." He explained that the reason for not implementing a 1 percentage point hike was, "I did not want to overreact to a single data point (August CPI)." Regarding housing cost inflation, which has been a concern, he predicted it would remain at a fairly high level for some time.

◇ U.S. Economic Growth Forecast Downgraded to 0.2%

On this day, the Fed also released the Summary of Economic Projections (SEP), raising the year-end inflation forecast to 5.4%, up from 5.2% in June. Inflation is expected to decline to 2.8% by the end of next year, 2.3% by the end of 2024, and reach the 2% target by the end of 2025.

On the other hand, the economic growth forecast was sharply downgraded. The forecast for this year dropped by 1.5 percentage points from 1.7% to 0.2%. The year-end unemployment rate forecast was raised to 3.8% from 3.7% in June. It is expected to rise to 4.4% next year.

Goldman Sachs evaluated the economic outlook released on this day as containing a message similar to that of the Jackson Hole forum, which said that inflation is very high and pain is necessary to reduce it.

Following the announcement of high-intensity tightening, the three major indices of the New York stock market all recorded declines of around 1.7%. The U.S. two-year Treasury yield, sensitive to monetary policy, briefly surpassed 4.1% during the session, reaching its highest level since 2007. However, the 10-year yield declined amid growing recession concerns. The dollar index, which measures the value of the dollar against six major currencies, rose more than 1% to 111.34.

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