Meritz: "High Possibility of US Benchmark Interest Rate Upper Limit Rising to 5.00%"

[Asia Economy Reporter Yoonju Hwang] Meritz Securities announced on the 3rd that the risk of the US federal funds rate forecast rising to an upper bound of 5.00% has increased ahead of the November Federal Open Market Committee (FOMC) meeting. However, it is expected that policy flexibility will be enhanced by reviewing actual inflation and economic conditions until the first quarter of 2023 and considering the financial market contraction situation.

Yoon Yeosam, a researcher at Meritz Securities, stated, "Adjustments to the 4.75% rate forecast will be made after confirming additional information up to the December FOMC."

Researcher Yoon analyzed, "The core issue is that markets vulnerable to policy uncertainty are factoring in the burden of monetary policy, resulting in rising interest rates and falling stock prices. Nevertheless, the fact that the 10-year US Treasury yield reached a high of 4.3% at a level pricing in the US federal funds rate threshold of 5.25%, considering the previous Taylor rule, core PCE suppression, and natural interest rate, will be an important key line until the December FOMC."

Jerome Powell, Chair of the Federal Reserve (Fed), acknowledged that entering the 4% range for the federal funds rate means that rates have reached a restrictive level. Researcher Yoon positively evaluated the mention of the possibility of slowing the pace of rate hikes starting in December at this FOMC.

Researcher Yoon diagnosed, "For now, it has been confirmed that the Federal Reserve's control of the benchmark interest rate expectations is focused upward due to high inflationary pressures, inflation expectation control, and favorable employment conditions, which supports a hawkish interpretation."

Researcher Yoon added, "Through the view that the speed of tightening and how long to maintain the absolute interest rate level and the upcoming restrictive period are more important, inflation expectations have been lowered and the transition to a financial easing environment has been controlled. This is also confirmed by the maintenance of quantitative tightening (QT), and the fact that there were no special questions or mentions regarding US Treasury liquidity by Treasury Secretary Yellen indicates that the tightening stance is still emphasized."

The halt of rate hikes depends on 'employment.' Researcher Yoon forecasted, "As economic slowdown pressures intensify centered on US corporate activities in the fourth quarter of this year, the Federal Reserve will be able to stop raising rates only after confirming a contraction in US employment conditions in the first quarter of 2023." In this process, expectations for the terminal rate may be raised to around 5.0%, as intended by Chair Powell.

He continued, "The possibility of testing previous upper bounds of rates around 4.8% for the 2-year US Treasury and 4.3% for the 10-year US Treasury has opened, but it will not be a trend," adding, "High volatility will be maintained while searching for a reversal opportunity."

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