"Skipping June for Now?" US Fed Likely to Hold Hawkish Pause... Indicator Variables

Since last March, the U.S. Federal Reserve (Fed) has continued a steep tightening cycle with 10 consecutive interest rate hikes, and now there is a flood of forecasts that it will finally take its first breather. The most likely scenario at this week's Federal Open Market Committee (FOMC) meeting is a so-called 'hawkish skip,' where the Fed skips a rate decision and signals a possible hike as early as July. In particular, the Fed's decision is expected to be a turning point not only for major central banks such as the European Union (EU), which have monetary policy meetings immediately afterward, but also for the recently bullish New York stock market.

[Image source=Reuters Yonhap News]

According to investment bank reports and major foreign media on the 11th (local time), Wall Street most strongly expects the Fed to maintain the federal funds rate at the current range of 5.0-5.25% at the two-day FOMC meeting on the 13th-14th. Goldman Sachs predicted a rate pause this month based on statements from Fed Chair Jerome Powell and Vice Chair nominee Philip Jefferson in its report. It expects a 0.25 percentage point hike in July. BNP Paribas also projected a terminal rate of 5.5% for the Fed, forecasting a hawkish skip in June followed by a hike in July. Capital Economics, Bloomberg Economics, and others also gave weight to the same scenario.

Anna Wong, an economist at Bloomberg Economics, said, "There is growing division within the Fed," and evaluated that "a hawkish skip decision could be made in June to achieve a unanimous FOMC decision." Within the Fed, there has been a split between hawks (who prefer monetary tightening) concerned about persistent inflation and an overheated labor market, and doves (who prefer monetary easing) who argue that it is time to pause hikes and assess the cumulative effects of policy. Accordingly, it is expected that the Fed will adopt a method of skipping the policy decision this month while keeping the door open for a hike next month through Chair Powell's hawkish press conference. The minutes of the May FOMC, released earlier, also contained content emphasizing the need to leave 'options' open for future meetings due to concerns about monetary policy uncertainty.

In this case, for the Fed, it would be a 'skip' rather than a pause in the rate hike cycle. Mark Sobel, U.S. Chair of the UK think tank OMFIF, said, "The Fed can raise rates at the July meeting if necessary," distinguishing that "'skip' is not 'pause'." Former Fed Vice Chair Roger Ferguson told CNBC, "Even if rates are paused this time, the market should prepare for further Fed hikes."

Investors' attention is also focused on the dot plot and revised economic forecasts released immediately after the FOMC. In particular, the key issue is how much the year-end rate forecast in the dot plot will be raised compared to before. The higher the upward revision, the more it signals additional rate hikes. Previously, the Fed presented a median year-end rate forecast of 5.1% in the March dot plot, and U.S. rates have already reached that level.

[Image source=Reuters Yonhap News]

A variable is the May Consumer Price Index (CPI) released on the 13th, the day before the FOMC meeting. While a hawkish skip is currently the most likely forecast, if the latest inflation data comes out strong, the possibility of an additional baby step hike cannot be ruled out. Previously, the central banks of Australia and Canada surprised markets by raising rates despite expectations of a pause. According to expert forecasts compiled by The Wall Street Journal (WSJ), May CPI is expected to rise 0.1% month-over-month and 4.0% year-over-year, showing a slowdown in the increase compared to April.

Frederic Mishkin, a monetary policy expert and professor at Columbia University, told CNBC, "I understand why the Fed wants to pause," but pointed out, "Inflation is still high. Since there is a long way to go to relieve inflationary pressures, I think it is better for the Fed to raise rates now." Earlier this year, Mishkin also argued in an interview with Asia Economy that rates should be raised to the 6% range. Brett Ryan, Chief U.S. Economist at Deutsche Bank, also supported further tightening, saying, "With a strong labor market and no signs of progress in inflation indicators, the Fed needs to do more." According to a recent survey conducted by the University of Chicago Booth School of Business of 42 economists, 67% of respondents expect the U.S. terminal rate to be between 5.5% and 6.0%, meaning they anticipate at least two more rate hikes.

The Fed's monetary policy decision is also expected to impact the recently rising New York stock market. The S&P 500 index, centered on large-cap stocks, entered a bull market last week and is approaching the 4,300 level. Goldman Sachs raised its year-end S&P 500 forecast from 4,000 to 4,500, seeing more than 5% upside potential. However, some analysts argue that since most stocks are still in a downtrend unlike the index, the bear market is not yet over. Moreover, if the Fed chooses a surprise hike instead of a hawkish skip, the stock rally could collapse. Previously, during the bear markets of 2000 and 2008, the market rose more than 20% from the lows before plunging again.

This week, besides the U.S., the European Central Bank (ECB), Taiwan, Hong Kong, and Japan will also hold monetary policy meetings. The ECB is widely expected to raise its policy rate by 0.25 percentage points from 3.75% at its meeting on the 15th. The Bank of Japan (BOJ), which will decide rates on the 16th, is expected to maintain its current policy.

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