US Fed Holds Key Interest Rate Steady... Signals "Two More Hikes This Year" in Dot Plot (Update)

Since March last year, the U.S. Federal Reserve (Fed) has been pursuing a rapid tightening policy, and it has finally decided to hold the benchmark interest rate steady. However, through the dot plot, it raised the year-end interest rate forecast to 5.6% (median), suggesting the possibility of two additional hikes this year. This is the so-called 'hawkish skip' card, which skips the current rate decision while signaling that hikes could resume as early as next month.

[Image source=Reuters Yonhap News]

On the 14th (local time), following the June Federal Open Market Committee (FOMC) regular meeting, the Fed announced in its policy statement that it would maintain the federal funds rate at 5?5.25%. After entering the rate hike cycle in March last year and raising rates ten consecutive times, the Fed took its first breather in 15 months by skipping a rate hike.

The FOMC explained the reason for the hold, stating, "Maintaining the target range for the federal funds rate at this meeting will allow the Committee to assess additional information and the cumulative effects of monetary policy." It also confirmed, "In determining the appropriate range of additional policy firming needed to return inflation to the 2 percent target, the Committee will consider the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments." The next FOMC meeting is scheduled for July 25?26.

This rate hold was already anticipated. Earlier, at the May FOMC, the Fed removed the phrase "additional policy firming may be appropriate" from the policy statement, signaling that a hold was approaching. Accordingly, ahead of the June FOMC, Wall Street insiders widely expected the Fed to skip a rate decision once while signaling further hikes. In addition, the consumer price index (CPI) released the day before showed the lowest increase in two years and two months, further strengthening market expectations for a hold.

However, what surprised the market was the hawkish dot plot. The Fed raised its year-end interest rate forecast to 5.6%, confirming that the tightening cycle is not over yet. This figure is significantly higher than the 5.1% year-end forecast in the March dot plot. It signals the possibility of two more baby steps (0.25 percentage point increases in the benchmark rate) within the year.

According to the newly released dot plot, out of 18 FOMC members, a majority of 9 expect the year-end rate to be between 5.50% and 5.75%. One member forecasted 6.0?6.25%, and two members forecasted 5.75%?6.0%. This is interpreted as reflecting the still sticky service prices and the persistent overheating of the labor market. Through its economic outlook update, the Fed lowered the year-end personal consumption expenditures (PCE) inflation forecast by 0.1 percentage points to 3.2%, while raising the core inflation forecast to 3.9%.

The market is currently awaiting the upcoming press conference by Fed Chair Jerome Powell. Powell is expected to emphasize the hawkish tone, stating that the tightening cycle is not over and that rate hikes could occur at any time during the press conference starting at 2:30 p.m. Meanwhile, investors are likely to seek signals that rate hikes are nearing their end and hints about how long high rates will persist.

The New York stock market, which started mixed, widened its losses after the FOMC policy statement was released in the afternoon. The Dow Jones Industrial Average, composed of blue-chip stocks, is down more than 1%. The S&P 500 and Nasdaq indices are also down around 0.6% each.

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