Next Year's Interest Rate Outlook Raised to '5.1%' by Fed: "No Consideration for Cuts"

[Image source=EPA Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] The U.S. Federal Reserve (Fed), which has implemented four consecutive high-intensity giant steps (raising the benchmark interest rate by 0.75 percentage points), began to slow the pace of tightening by narrowing the rate hike increments starting in December, a result that was anticipated early on. This is why the market focused more on the Fed officials' future rate projections compiled in the 'dot plot' rather than the size of the rate hike at this year's final Federal Open Market Committee (FOMC) meeting.

The Fed raised the median terminal rate for next year to 5.1% on the dot plot, confirming its policy to maintain "higher rates for longer." Fed Chair Jerome Powell also dismissed market expectations of a pivot by stating, "We are not considering rate cuts yet."

◆Fed Raises Next Year's Rate Outlook to 5.1%... Signals Additional 0.75%P Hike

The dot plot released immediately after the Fed's rate decision on the afternoon of the 14th (local time) showed a terminal rate range of 5.00?5.25% (median 5.1%) for next year. This is a 0.5 percentage point increase from the previous September dot plot forecast of 4.5?4.75% (median 4.6%).

With the big step (0.5 percentage point rate hike) decision on this day, the U.S. benchmark interest rate reached 4.25?4.5%, the highest level in 15 years. Additionally, the Fed signaled further rate hikes totaling 0.75 percentage points in 2023. Chair Powell said at the press conference, "Seventeen out of 19 FOMC participants expect the terminal rate next year to be above 5%," adding, "The policy stance is not yet sufficiently restrictive, so continued rate hikes are appropriate."

While the Fed's big step decision was widely expected, the 5.1% terminal rate on the dot plot exceeded market expectations. Powell also noted, "We have raised rate projections every time we released the Summary of Economic Projections (SEP) this year," and added, "I am not confident that we will not raise them again. It will depend on future data," leaving open the possibility of further increases.

When asked about plans for rate cuts in 2023, Powell firmly stated, "We are not considering rate cuts yet." He emphasized, "The Fed's focus is on maintaining sufficiently restrictive policy to achieve the 2% inflation target, not on cutting rates," and added, "The SEP does not reflect any possibility of rate cuts."

These remarks reflect the Fed's assessment that achieving the 'price stability' goal is not as easy as expected. According to the SEP released that day, the Fed's preferred inflation gauge, the core Personal Consumption Expenditures (PCE) price index forecast for next year, was revised upward to 3.5% from the September forecast of 3.1%. This suggests that persistent high inflation could prolong the Fed's tightening cycle.

Although Powell welcomed recent consumer price index (CPI) figures that fell short of expectations, he remained cautious, stating, "We need much more evidence to be confident that inflation is consistently declining." Citing concerns about an overheated labor market, he said, "Commodity prices have turned down quite quickly, but housing and service inflation are unlikely to fall quickly. We may need to raise rates even higher."

◆Additional Big Step or Baby Step... Eyes on February

The market's focus is on the size of the next rate hike. Due to repeated messages about assessing the impact of cumulative tightening on the economy, there is speculation that the Fed may narrow the rate hike increment further to a 'baby step' (0.25 percentage point increase) at the first FOMC meeting of next year, scheduled for January 31?February 1.

Investment bank Citi noted, "Given the statement that the terminal rate level is more important than the pace, there is a possibility of a 0.25 percentage point hike in February." Wells Fargo also sees a high likelihood of a 0.25 percentage point increase. On the other hand, Jefferies weighs in on a big step in February followed by a baby step in March.

At the press conference, Chair Powell avoided giving specific answers about the future size of rate hikes. He said, "How much we raise is less important than how high and how long we maintain rates," adding, "We will decide the size of hikes based on incoming data and economic and financial conditions." When asked if they would raise rates by 0.25 percentage points incrementally while monitoring the situation, he replied, "We have not decided," but mentioned, "We will slow the pace."

However, some still expect a pivot. Considering growing recession concerns, there is a diagnosis that sustaining high-intensity tightening will be difficult. Through the SEP, the Fed projected U.S. GDP growth at 0.5% for this year. The growth forecast for next year was also lowered from 1.2% in September to 0.5%. Meanwhile, the unemployment rate was raised to 4.6%. TD Securities commented, "Lowering the GDP growth forecast close to zero and raising the unemployment rate may indicate that the Fed expects a recession," but Powell reaffirmed his stance on stagflation concerns by stating, "Our mission is price stability."

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