The Hawkish November FOMC... Kiwoom "Bond Market Sentiment Recovery Difficult"

Final Interest Rate Level Presented at 5.25%

[Asia Economy Reporter Minji Lee] Kiwoom Securities evaluated on the 3rd that it is premature to expect a recovery in bond market sentiment despite the hawkish stance of the November Federal Open Market Committee (FOMC).

As expected by the market, the Federal Reserve (Fed) implemented its fourth consecutive 75bp (0.75 percentage points) interest rate hike, setting the policy rate at 3.75?4.00%. This decision was based on the assessment that a steep rate increase is necessary given the robust labor market.

In this statement, the Fed added that it will monitor the cumulative effects of past tightening and monetary policy with a time lag on inflation, economic activity, and financial markets before deciding on the pace of future rate hikes. Consequently, the market expanded expectations for a slowdown in rate hikes at the December FOMC, anticipating the increase to be lowered to 50bp. However, when Fed Chair Jerome Powell delivered hawkish remarks during the press conference, all hopes for a peak in rate hikes vanished.

Ahn Yeha, a researcher at Kiwoom Securities, said, “The market interest rates rebounded following Powell’s comments emphasizing the need to focus on how much to raise rates and how long to maintain them, stating that it is premature to consider pausing rate hikes now.” He added, “The Fed also maintained the possibility of an upward revision to the dot plot going forward.”

As a result of this FOMC, the terminal rate level presented in September is expected to be revised upward from 4.6%. Kiwoom Securities forecasts the terminal rate level at 5.25%. Researcher Ahn Yeha projected, “Considering the meeting comprehensively, a 50bp hike will be implemented at the December meeting, followed by an additional 50bp hike in February next year, and a 25bp hike in March.”

The continuation of the rate hike cycle has made the recovery of bond market sentiment even more distant. Researcher Ahn said, “Caution regarding inflation and monetary policy will continue through the first quarter,” and added, “Given the high uncertainty about the terminal rate level, market interest rates will continue to trend upward.”

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