The Fed Turns More Hawkish... Will Rate Cuts Be Delayed Further?

Biden Names Philip Jefferson as Vice Chair
Lisa Cook Renominated, Kugler Appointed New Director
FOMC Directors Analyzed... Hawkish Instincts
China's Slow Economic Recovery, US-Korea Financial Instability Pose Variables

[Image source=AP Yonhap News]

Recently, as 'hawkish (preference for monetary tightening)' remarks from members of the U.S. Federal Reserve (Fed) have continued, there is an analysis that the timing of U.S. interest rate cuts may be somewhat delayed. The pivot (monetary policy shift) expectations that spread after the Federal Open Market Committee (FOMC) meeting on the 4th have also slightly contracted. In a situation where U.S. inflation has yet to show clear stability, Philip Jefferson, who was nominated as the Fed's 'number two,' has continuously expressed concerns about inflation, emphasizing the maintenance of a tightening stance.

U.S. Rate Hikes Have Paused... But Timing of Cuts is 'Uncertain'

According to the Bank of Korea and major foreign media on the 16th, while the U.S. consumer price inflation rate has been gradually slowing, financial market instability following the collapse of Silicon Valley Bank (SVB) continues. As a result, many in the market analyze that the Fed will find it difficult to raise rates further. Market forecasts expect the benchmark interest rate to be held steady at the FOMC meetings scheduled for June 14 and July 26 (local time), with probabilities of 78.1% and 59.3%, respectively, as of this date, exceeding half.

The U.S. Consumer Price Index (CPI) inflation rate for April, released on the 10th, dropped to 4.9%, influencing these market expectations. The fact that inflation has slowed for ten consecutive months is evidence that the Fed's high-intensity tightening is working effectively. Given that the tightening has strengthened lending standards at U.S. banks and many expect a recession to come sooner, there is an analysis that the Fed no longer has justification to continue raising rates.

However, the possibility of the Fed cutting rates within this year is a different matter. Although the inflation rate has decreased, it remains above the Fed's target of 2%, and the core CPI, which is important for judging price stability, remains in the 5% range. Notably, the recently released 1-year expected inflation (announced by the University of Michigan) was 4.5%, higher than the market's forecast of 4.4%. The 5-year expected inflation also exceeded expectations at 3.2%, compared to the market's 2.9%. Having not confirmed clear price stability, experts believe the Fed is likely to maintain a hawkish stance by pointing to persistently high inflation for the time being.

Philip Jefferson, nominated as Vice Chair of the U.S. Federal Reserve Board [Photo by AP Yonhap News]

"Low Inflation is Key"... Fed's Number Two 'Jefferson'

Looking at recent remarks from Fed board members, it is difficult to expect rate cuts prematurely. U.S. President Joe Biden last week nominated Philip Jefferson as the Fed's 'number two,' Vice Chair. Jefferson is classified as a neutral figure but has consistently supported rate hikes since joining the Fed board in May last year, and recently has shown a tightening-preferred attitude, emphasizing that inflation slowdown is more important than concerns about economic slowdown.

The Bank of Korea's Washington office explained about Jefferson, nominated as Fed Vice Chair, that "during his tenure as a board member, he generally shared views with Chair Powell and has never expressed dissenting opinions," and "he has repeatedly emphasized the Fed's firm policy commitment to achieving the 2% inflation target, even though it will not be easy." He also opposed recent calls to raise the Fed's inflation target of 2%.

Before joining the Fed board, Jefferson was an economist researching monetary economics and finance. He has frequently mentioned poverty and inflation. In a speech at the 'Opportunity and Inclusive Growth Institute' in November last year, he emphasized, "Inflation is felt most severely by the most vulnerable (low-income) people," and "low inflation is key to achieving long-term, sustained expansion, that is, an economy for all."

There is also a difference compared to Lael Brainard, the former Vice Chair who moved to the White House National Economic Council (NEC) chairmanship earlier this year and showed a clear dovish (monetary easing preference) stance. Jefferson must pass a Senate confirmation hearing to become Fed Vice Chair, but since he was confirmed with 91 votes in favor and 7 against in the Senate vote when nominated as a board member in May last year, he is expected to pass smoothly this time as well.

Jerome Powell, Chairman of the U.S. Federal Reserve (left), and Janet Yellen, U.S. Secretary of the Treasury, are taking a group photo at the Group of Seven (G7) Finance Ministers' Meeting held on the 12th in Niigata, Japan. [Image source=Yonhap News]

"Inflation Over Economy"... Fed's Hawkish Instinct

In addition to Jefferson, President Biden also nominated Adriana Kugler, Managing Director of the World Bank, as a new Fed board member, and re-nominated Lisa Cook to extend her term for 14 more years from the remaining term ending January 2024. Cook, who became the first Black woman Fed board member in May last year, was initially expected by some to voice dovish opinions but has instead supported the hawkish stance, emphasizing that "the actual decline of inflation based on data is important."

The Bank of Korea's Washington office explained about Cook, "She has never expressed dissenting opinions and recently stated that if tight financial conditions negatively impact the economy, the appropriate interest rate path might be lower, but if economic indicators show sustained growth and delayed disinflation, the monetary policy tightening path should be maintained."

The New York Times reported on the 11th (local time) about President Biden's Fed board nominations, evaluating that "Jefferson and Cook are likely to support the Fed's current project of rapidly curbing inflation." Among the seven permanent Fed board members, excluding Chair Powell and the three newly nominated or re-nominated members, Vice Chair Michael Barr, Michelle Bowman, and Christopher Waller remain, with Waller and Bowman classified as hawkish.

In particular, Bowman said at a symposium hosted by the European Central Bank (ECB) in Frankfurt, Germany, on the 12th (local time), "If inflation remains high and the labor market tight, additional monetary policy tightening would be appropriate." Ahead of next week's Monetary Policy Committee meeting, the Bank of Korea is expected to keenly watch the speeches of Fed officials, including Lisa Cook's speech on this day, Jefferson's speech on the 18th, and Vice Chair Michael Barr's hearing testimony.

Michelle Bowman, Member of the Board of Governors of the U.S. Federal Reserve (Fed)
[Photo by Reuters]

China's Deflation Variable... When Will Korea and U.S. Cut Rates?

Even on Wall Street, while further U.S. rate hikes seem difficult, many believe rate cuts will not be easy for the time being either. Jaegyun Lim, a researcher at KB Securities, said, "Despite recent inflation slowdown, the rebound in 3-year and 5-year expected inflation from the New York Federal Reserve Bank in April, followed by the University of Michigan's 5-year expected inflation, suggests that it may be difficult for inflation to fall to the target level," adding, "There are many Fed members who indicate additional rate hikes."

However, recent issues such as the U.S. federal government's debt default risk and deteriorating soundness of regional banks could act as constraints on further tightening in the U.S. Especially, China's slower-than-expected economic recovery is a factor making it difficult for both the U.S. and Korea to maintain tightening longer. China's April CPI, announced last week, rose only 0.1% year-on-year, marking the lowest in 2 years and 2 months, raising concerns about deflation.

Sanghyun Park, a researcher at Hi Investment & Securities, said, "We expect China's economy to normalize, but the situation is not easy," and explained, "Although the possibility is still low, if the U.S. Fed cuts policy rates due to easing inflationary pressures and China also cuts policy rates to escape deflation, it could positively affect the domestic economy and stock market in the second half."

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