"No Interest Rate Hike in 2023 According to Fed... Market Does Not Trust"

Strong US Job Market... Basis for Fed Tightening
Possibility of Declining Expectations for Future Rate Cuts

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] As the market focuses on the economic recession, doubts have arisen about the Federal Reserve's (Fed) tightening resolve. However, there is an analysis that market interest rates will rebound as expectations for future rate cuts diminish. This is because a strong labor market is holding back service inflation. In the December Federal Open Market Committee (FOMC) minutes, all members agreed that a rate cut in 2023 would not be appropriate, which can be interpreted in this context.

Jaekyun Lim, a researcher at KB Securities, stated, "The U.S. Fed is expected to raise the benchmark interest rate by 25 basis points (1bp = 0.01 percentage points) in both February and March, resulting in a final benchmark rate of '4.75~5.00%,' but the possibility of it reaching '5.00~5.25%' should also be kept open."

According to the December FOMC minutes, even non-voting members supported a 50bp rate hike. The Fed indicated that as interest rates approach restrictive levels, adjusting the pace of rate hikes is the best way to achieve both maximum employment and price stability.

Concerns about inflation remained. Despite the slowdown in inflation in October and November, additional evidence was emphasized as necessary to confirm that prices are indeed falling. In particular, members mentioned that restrictive monetary policy should be maintained until clear evidence shows that inflation is moving toward 2%.

Previously, the Fed had segmented inflation into three categories: 'goods prices, housing prices, and service prices.' Currently, goods prices have fallen significantly. New rents related to housing costs are also decreasing. However, core inflation excluding housing is still considered high.

The problem lies in the strong employment indicators (service prices). Researcher Lim said, "The minutes evaluated that the unemployment rate is historically low, wages are rising, and job openings remain robust," adding, "The resolution of supply-demand imbalances in the labor market is not improving as quickly as expected, so the period of underperforming potential growth will be delayed by about one year compared to the previous forecast (2024)."

According to the Automatic Data Processing (ADP) employment report, the number of nonfarm payrolls in the U.S. for December was 127,000, falling short of the consensus estimate of 200,000. However, job openings in November reached 10,458,000, exceeding the expected 10,000,000. The Institute for Supply Management (ISM) manufacturing employment index also showed a solid performance, recording 51.4%, surpassing both the previous month’s 48.3% and the baseline 50%.

Researcher Lim explained, "Due to the U.S. labor shortage, wage growth in the U.S. remains at a high level," and added, "Workers who have changed jobs tend to have higher wages than existing employees." He further pointed out, "Service prices are closely linked to wages, and rising wages can slow the pace of service price deceleration."

Meanwhile, opinions were divided on excess savings, which had driven the labor market and private consumption in October and November. A couple of members mentioned that consumption would remain robust due to excess savings. On the other hand, another couple of members diagnosed that excess savings among low-income groups are rapidly decreasing, and high-income groups are unlikely to use their excess savings.

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