US Fed Slows 'Big Step' Pace, Raises Final Rate to 5.1% Next Year (Update)

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] The U.S. central bank, the Federal Reserve (Fed), implemented a so-called ‘big step’ by raising the benchmark interest rate by 0.5 percentage points at once. As initially announced, it stepped back from the unusual four consecutive giant steps (0.75 percentage point hikes) and began to adjust the pace of tightening. However, the Fed also confirmed its policy to maintain "higher rates for longer" by raising the projected terminal rate to 5.1% next year on the dot plot.

On the 14th (local time), the Fed announced after the Federal Open Market Committee (FOMC) regular meeting that it would raise the federal funds rate by 0.5 percentage points from the previous 3.75?4.0% to 4.25?4.5%.

The FOMC stated, "Sustained increases in the federal funds rate will be appropriate to return inflation to the 2% target." It also mentioned that in deciding the pace of rate hikes, it would "consider the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."

Furthermore, it added, "We will continue to monitor incoming information regarding the economic outlook" and "are prepared to adjust monetary policy appropriately if risks emerge," indicating the possibility of future policy adjustments.

This 0.5 percentage point hike was a decision anticipated by the market. Fed Chair Jerome Powell had hinted at slowing the pace as early as December, and recent inflation data confirmed signals that the worst phase had passed.

Accordingly, the cautious stance within the Fed, emphasizing the need to avoid unnecessary recession by assessing the cumulative effects of tightening, gained strength. The Consumer Price Index (CPI) for November, released the day before, rose 7.1% year-on-year, below the market expectation of 7.3%, bolstering hopes for a peak in inflation. This was the smallest monthly increase since December last year.

However, the Fed raised the median terminal rate for next year to 5.1% on the dot plot. As Chair Powell had indicated, while adjusting the pace of tightening, the Fed formalized the message of maintaining rates at a higher level for a longer period. The median terminal rate on the dot plot rose by 0.5 percentage points from 4.6% in September to 5.1%. The rate for the following year was also revised upward from 3.9% in September to 4.1%.

Alongside this, the U.S. GDP growth rate for this year was projected at 0.5%. The growth forecast for next year was adjusted down from 1.2% in September to 0.5%. The unemployment rate for next year was revised up from 4.4% to 4.6%. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, was expected to be 5.6% this year and 3.1% next year, compared to previous forecasts of 5.4% and 2.8% in September.

With the Fed’s rate decision, the interest rate gap between South Korea (3.25%) and the U.S. widened to 1?1.25 percentage points. This is close to the largest ever U.S.-Korea rate inversion of 1.50 percentage points. Concerns about foreign capital outflows and depreciation of the Korean won have been raised.

Since entering the rate hike cycle with a 0.25 percentage point increase in March this year, the Fed has continued its tightening path with hikes of 0.5 percentage points in May, 0.75 percentage points in June, July, September, and November.

The market is currently awaiting Chair Powell’s press conference scheduled to begin at 2:30 p.m. local time. Following the release of the FOMC statement, the New York stock market gave up earlier gains and fell across the board. Although the 0.5 percentage point hike was widely expected, the higher-than-expected terminal rate on the dot plot appears to have triggered the downturn. As of 2:20 p.m., the Nasdaq index was trading down about 0.85% from the previous close.

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