US Fed, One Last Rate Hike... 2006 FOMC Provides a 'Hint'

Banking Crisis and Three Consecutive Months of Job Openings Decline
Weight on Tightening Cycle End
Hints Expected in FOMC Statement on the 3rd

The end of the U.S. Federal Reserve's (Fed) interest rate hikes is imminent. It is expected that the Fed will raise rates for the last time at the Federal Open Market Committee (FOMC) meeting on the 3rd (local time) and conclude the tightening cycle that has lasted over a year. There are also market expectations that the Fed will begin cutting rates within the year.

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On the 2nd, The New York Times (NYT) reported that the Fed may signal a halt to rate hikes by raising rates by 0.25 percentage points to 5-5.25% at the FOMC meeting on the 3rd. It viewed the crisis among small and medium-sized banks following the March collapse of Silicon Valley Bank (SVB) as a factor that could undermine the Fed's tightening stance.

The NYT analyzed, "The banking crisis will affect policy," adding, "It is clear that banks will at least partially withdraw loans in response to the recent turmoil." Since credit tightening, such as loan reductions, has effects similar to rate hikes, it is expected to influence the Fed's policy decisions.

The market anticipates a baby step (a 0.25 percentage point increase in the benchmark interest rate) to be decided at this FOMC. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) futures market currently sees an 89.3% chance that the Fed will raise rates by 0.25 percentage points on the 3rd.

The overheated labor market, which pressured the Fed's tightening, is gradually cooling down. Amid ongoing layoffs by major U.S. companies, the U.S. Department of Labor released the March Job Openings and Labor Turnover Survey (JOLTs) report showing that private sector job openings in March fell for the third consecutive month to 9.59 million. The number of job openings is the lowest monthly figure in about two years since April 2021 and also fell short of Wall Street's forecast of 9.7 million. The risk of recession has increased as the U.S. first-quarter growth rate dropped sharply to 1.1% from 2.6% in the previous quarter, complicating the Fed's stance amid the tightening cycle.

U.S. media reported that the Fed's statement on the 3rd will provide clues about whether the final rate hike will occur. In particular, attention should be paid to the June statement when the Fed ended the tightening cycle in 2006 by raising rates for the last time. From January to May that year, the Fed used the phrase "additional policy firming may be needed." However, in June, when it raised rates for the last time, it removed this phrase and instead included, "The extent and timing of any additional firming that may be needed to address risks will depend on the economic outlook." Afterward, rates were held steady until the fall of 2007 before turning to cuts.

The Wall Street Journal (WSJ) said, "(The January 2006 statement) is very similar to the statement Fed officials made at their most recent meeting in March this year," and that whether this phrase is revised in the statement after the FOMC on the 3rd will be a signal to gauge the end of tightening. The outlet added, "The Fed may also make a statement similar to June 2006, when it raised rates but sent a strong signal that it could be the last hike."

The market is expecting a 'pivot' (a shift in monetary policy direction) within the year. The NYT reported, "Investors expect the Fed to pause rate hikes this week, hold rates steady for several months, and then cut them to 4.5-4.75% by the end of the year."

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