Fed's Powell: "Rate Hold Is Near... Not Considering Cut" (Update)

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), indicated that the interest rate hike cycle, which has lasted for over a year, is nearing its end. However, he dismissed the possibility of a pivot (direction change) within the year, stating that inflation will not fall as quickly as expected. Regarding concerns over a banking crisis spreading from the Silicon Valley Bank (SVB) incident, he emphasized that all depositors' funds are protected and assessed that the crisis is almost over.

[Image source=Reuters Yonhap News]

At a press conference held immediately after the May Federal Open Market Committee (FOMC) regular meeting on the 3rd (local time), Powell was asked about the possibility of a rate freeze in June. He said, "Today, we raised the (benchmark) interest rate by 0.25 percentage points. We did not decide to pause today," but added, "I think it is meaningful that the phrase 'additional policy firming' included in the March statement was excluded this time."

At this meeting, the Fed raised the federal funds rate by 0.25 percentage points from the previous 4.75?5% range to 5?5.25%. Along with this, the monetary policy statement removed the phrase "some additional policy firming may be appropriate to achieve a sufficiently restrictive monetary policy stance." This suggested that rates could be held steady starting from the next meeting. However, Powell did not give a definitive confirmation of a freeze that the market had anticipated. He emphasized, "We are prepared to tighten more aggressively if necessary," and "We will act based on data received at each meeting. We will also monitor credit conditions in the banking sector."

Before this meeting, market attention had shifted early on from the size of the hike to the Fed’s future moves. Powell revealed that a 'pause' was not directly discussed during the two-day meeting. He stated, "There was general agreement on a 0.25 percentage point increase," but also assessed that "a pause may be approaching or getting closer." When asked whether the current level is sufficient to decide on a freeze at the next FOMC, he replied, "It is difficult to give a definitive answer," adding, "We need to see the data."

In particular, he expressed the view that appropriate adjustments are needed as credit conditions have tightened further due to the SVB incident. He emphasized, "Our rate hikes are aimed at achieving price stability," and explained the need to balance between insufficient tightening, which fails to control inflation well, and excessive tightening, which overly slows the economy. He added, "We have raised rates by 500 basis points (5.0 percentage points) over about a year. That can be sufficiently restrictive," but also noted, "More data is needed to judge whether it is sufficiently restrictive."

He drew a firm line against the possibility of rate cuts within the year. Powell said, "We expect inflation will not fall quickly," and "It will take more time, and if this forecast is correct, a pivot is not appropriate. We will not cut rates." This dashed market hopes for a significant rate cut within the year, starting with a freeze in June. Powell explained that for a rate cut decision, the labor market and labor demand need to weaken further. Earlier, in his opening remarks at the press conference, he had stated, "Although inflation has somewhat eased since mid-last year, there is still a long way to go," and "It will take time for overall prices to stabilize."

Regarding recent concerns about a U.S. banking sector crisis, Powell said, "The situation has improved since March (right after SVB’s bankruptcy). The U.S. banking system is sound and resilient," and added, "We will monitor to ensure that such an event does not happen again, learning from this case." When asked whether the banking crisis is at the beginning or end, he replied, "I think it is almost over." He also positively evaluated JP Morgan Chase’s acquisition of First Republic Bank this week.

On questions about recession concerns, he diagnosed, "Unlike past recessions, despite raising rates by 5 percentage points, the labor market remains strong. It seems possible to cool the labor market without an increase in unemployment," and "I believe the chances of avoiding a recession are higher than the chances of a recession."

Meanwhile, with the U.S. interest rate ceiling rising to 5.25%, the interest rate gap with South Korea has widened to 1.75 percentage points, reaching a historic high. The Bank of Korea is scheduled to hold its last Monetary Policy Committee meeting of the first half on the 25th.

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