Heungkuk Securities "Tightening Expected to End After 25bp Increase at May FOMC"

Heungkuk Securities predicted that the Federal Reserve (Fed) will end its tightening cycle after a 25bp (1bp=0.01 percentage point) rate hike at the May Federal Open Market Committee (FOMC) meeting. However, it analyzed that expectations for a rate cut within the year are weakening.

Cha Hyun-gi, a researcher at Heungkuk Securities, stated, "Considering that the final rate level was decided to be 5.00?5.25%, the same as in December last year, through the rate outlook dot plot, it is highly likely that the rate hike cycle will conclude after an additional rate hike at the upcoming May meeting."

Researcher Cha explained, "The 25bp hike decision at the March FOMC can be interpreted as a compromise policy decision aimed at continuing to curb inflation while promoting financial stability. Although there were opinions advocating for a rate freeze or cut, it was reaffirmed that rate hikes are still necessary to stabilize prices."

Researcher Cha also evaluated that the cautious stance regarding the market's expectations for a rate cut within the year was reaffirmed. He diagnosed, "This is based on the fact that the inflation rate (based on Core PCE inflation) for 2023 and 2024 has been slightly revised upward, indicating that the disinflation process is proceeding more slowly than expected, and the forecast that inflation will approach the 2% target around 2025."

He pointed out that uncertainty about the future economic outlook has also increased. Researcher Cha assessed, "Growth forecasts for this year and next year have both been revised downward, reflecting that a high level of interest rates will be maintained to curb inflation and that current banking sector instability could lead to tighter financial conditions."

Accordingly, sensitivity to economic indicators is expected to increase again after the March FOMC. Researcher Cha forecasted, "The Fed has expressed uncertainty about the extent of the impact of the financial sector instability on economic activity, employment, and inflation, and concerns about economic slowdown persist due to the downward revision of growth forecasts."

He added, "The financial instability expanded after the Silicon Valley Bank (SVB) incident is a factor weakening expectations for rate cuts and is expected to increase volatility in short-term interest rates."

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