Fed Dashes Pivot Hopes: "Rate Hikes Will Continue... No Early Shift"

[Asia Economy New York=Special Correspondent Joselgina] The U.S. central bank, the Federal Reserve (Fed), reaffirmed its tightening stance to maintain higher benchmark interest rates until inflation is decisively controlled. This effectively doused market hopes for a pivot (direction change) within the year.

According to the minutes of the December Federal Open Market Committee (FOMC) meeting released by the Fed on the 4th (local time), participants judged that "a restrictive policy stance needs to be maintained until there is confidence through economic indicators that inflation is on a sustained downward path to the 2% target," adding, "this will take time." Among the 19 FOMC members, none expected an interest rate cut to be appropriate in 2023.

[Image source=Reuters Yonhap News]

Earlier, at the December FOMC, the Fed ended four consecutive giant steps (0.75 percentage point rate hikes) but raised the U.S. benchmark interest rate to 4.25%?4.5%, the highest level in 15 years. Notably, the Fed’s dot plot released simultaneously projected a year-end rate forecast of 5.0?5.25%, implying at least a 0.75 percentage point increase this year.

The minutes evaluated this rate path as "highlighting the Committee’s strong commitment to returning inflation to the 2% target." Participants at the meeting pointed out that "inflation remains persistently and unacceptably high." Furthermore, many FOMC members drew a line against an early pivot, noting that "historical experience also cautions against easing monetary policy too soon."

Among FOMC participants, there was also caution that the Fed’s pace moderation, which reduced the size of rate hikes starting in December, could be overinterpreted by the market. They emphasized that "it is important to clearly communicate that slowing the pace of rate hikes does not weaken the Committee’s resolve to achieve price stability nor reflect a judgment that inflation is on a sustained downward path." They also expressed concern that "if financial conditions become inappropriately accommodative due to public misunderstanding of the Committee’s response, efforts to restore price stability will become more complicated." This statement is read as a warning that the market’s spreading pivot expectations could become an obstacle to the Fed’s inflation mitigation efforts.

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed) [Image source=Reuters Yonhap News]

Fed Chair Jerome Powell also stated at the post-December FOMC press conference that rate hikes would continue in 2023 and that high levels of interest rates would be maintained for some time even after the hiking cycle ends. Nevertheless, amid growing recession concerns, the market increasingly expects the Fed to halt rate hikes in the first half and pivot to cuts in the second half.

Six out of ten Wall Street investment banks forecast that the Fed will pivot to rate cuts in the second half. Morgan Stanley, Barclays, Bank of America, Deutsche Bank, and TD expect U.S. rates to peak between March and May and be cut in the fourth quarter. Nomura projects an even earlier rate cut possibility in the third quarter.

Meanwhile, a senior Fed official argued that rates should be raised by 1 percentage point in the first half alone. According to the Wall Street Journal (WSJ), Neel Kashkari, President of the Minneapolis Federal Reserve Bank, stated in an online post that rates are expected to rise to around 5.4% in the first half of this year, meaning a 1 percentage point increase from the current level. Kashkari said, "There is evidence that inflation has peaked, but it is too early to be certain," adding, "I think rates need to continue rising for at least the next several FOMC meetings."

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