Started US FOMC... "Not November Meeting, It's December Meeting"

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] "This is not the November meeting. It is effectively the December meeting."

On the 1st (local time), the two-day regular meeting of the U.S. Federal Reserve's (Fed) November Federal Open Market Committee (FOMC) began, drawing a flood of evaluations from Wall Street. With the giant step (a 0.75 percentage point increase in the benchmark interest rate) becoming a foregone conclusion at this meeting, the key question is whether the Fed will slow the pace of tightening in the next step.

However, as indicators showing that U.S. labor demand remains robust were released on the same day, expectations for the Fed to slow its pace weakened somewhat compared to the previous day.

◇ November Giant Step Likely, What About December?

According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) futures market currently reflects more than an 86% probability of a giant step in November. In this case, the U.S. benchmark interest rate would reach 3.75%?4.00%, the highest level since the end of 2007.

Investors' attention is already focused on December. In the interest rate futures market, the probability of a giant step in December is 49.7%, while a big step (0.5 percentage point increase) is 44.5%. There are competing views: one expects the Fed to continue high-intensity rate hikes into early next year, while the other anticipates the Fed may slow the pace from December to avoid unnecessary economic recession caused by excessive tightening.

Investment banks such as Deutsche Bank, UBS, Credit Suisse, and Nomura Securities expect the Fed to raise rates by 0.75 percentage points this month and to raise by the same amount again in December. On the other hand, Bank of America (BoA), Goldman Sachs, Morgan Stanley, and Evercore ISI predict the Fed will slow the pace to 0.5 percentage points in December.

Ellen Meade, a professor at Duke University and former senior Fed advisor, said, "They need to slow down," adding, "December will be a natural time to slow the pace of rate hikes." She pointed out that it is a time to be cautious as the cumulative policy effects of giant steps could overwhelm the economy all at once.

In contrast, Matthew Luzzetti, chief economist at Deutsche Bank, referred to the FOMC members' dot plot indicating a median rate of 4.6% next year and said, "If inflation continues to be higher than expected, it makes sense to reach the terminal rate faster," supporting a hawkish (monetary tightening) stance.

◇ All Eyes on Powell's Words

With Wall Street forecasts sharply divided, investors seem eager to find hints about the December rate hike size from Fed Chair Jerome Powell's press conference scheduled for the afternoon of the 2nd.

The dot plot showing FOMC members' interest rate path projections will not be released at this meeting. This is why investors are paying even closer attention to Chair Powell's remarks. The press conference will be notable not only for evaluations of the future path of inflation, the labor market, and recession risks but also for Powell's comments on the recently highlighted U.S. Treasury market instability.

Jake Jolly, chief investment strategist at BNY Mellon, said, "The important thing is how much he says about December," adding, "If he remains relatively quiet and does not reveal his thoughts, it could be interpreted as hawkish." Rick Rieder, Chief Investment Officer (CIO) at BlackRock, said, "Chair Powell will say that four consecutive giant steps are too large and that we need to step back and observe the effects," noting, "We are already seeing these effects in housing, automobiles, retail, and surveys. How Powell describes this is important."

However, the September Job Openings and Labor Turnover Survey (JOLTS) released that day reaffirmed the labor market's strength, slightly weakening market expectations for the Fed to slow its pace compared to the previous day. The number of job openings at U.S. companies in September was 10.7 million, exceeding both the previous month's 10.3 million and market expectations of 9.8 million. This suggests the labor market remains robust and upward inflationary pressures persist. Ed Moya, senior analyst at OANDA, predicted a hawkish tone at the press conference.

On the same day, The New York Times (NYT) also pointed out that many companies have recently signaled price increases through earnings reports, diagnosing that inflationary pressures may increase further despite the Fed's efforts to curb inflation. This is also cited as a reason why the Fed must continue high-intensity tightening despite repeated recession warnings.

Michael Gapen, chief economist at BoA, evaluated, "The November meeting is actually not about November. It is about December."

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