US Fed Pauses Briefly, Signals Two More Rate Hikes This Year (Comprehensive)

Since March last year, the U.S. Federal Reserve (Fed) has been on a steep tightening path, and it has finally decided to hold the benchmark interest rate steady. However, through the dot plot, it raised the year-end rate forecast to 5.6% (median), suggesting that two more hikes remain. This rate decision is a 'hawkish skip' card, skipping this hike but signaling increases as early as next month.

[Image source=Reuters Yonhap News]

Rate Hold After 10 Consecutive Hikes

On the 14th (local time), following the June Federal Open Market Committee (FOMC) regular meeting, the Fed announced in its monetary policy statement that the federal funds rate would be maintained at the existing 5.0?5.25%. After raising rates ten consecutive times since March last year to curb inflation, the Fed took its first breather. The FOMC explained the hold by stating, "By maintaining the target range at this meeting, we can assess additional information and the cumulative effects of monetary policy." The interest rate gap between South Korea and the U.S. also remained at 1.75 percentage points based on the upper bound of the U.S. rate.

This hold decision was already anticipated. What surprised the market was the hawkish dot plot. The Fed raised its year-end rate forecast in the dot plot from 5.1% to 5.6%, confirming that the tightening cycle is not over yet. This signals the possibility of two more baby steps (0.25 percentage point hikes) within the year.

Fed Chair Jerome Powell said at the subsequent press conference, "Almost all participants see additional rate hikes this year as appropriate." He added, "Despite raising rates by 5 percentage points and rapidly shrinking the balance sheet, the full effects of tightening have not yet been felt," and expressed strong concerns about inflation, saying, "Core inflation is not moving in the direction the Fed wants. A decisive decline must be confirmed."

According to the new dot plot, more than half of the 18 FOMC members, nine, expect the year-end rate to be between 5.50% and 5.75%. One member projected 6.0?6.25%, and two members forecast 5.75?6.0%. This reflects the persistent stickiness of core inflation in services and the ongoing overheating of the labor market. The Fed also updated its economic outlook, lowering the year-end personal consumption expenditures (PCE) inflation forecast by 0.1 percentage points to 3.2%, while raising the core PCE inflation forecast to 3.9%. Powell added, "No members expect rate cuts this year," and said, "I also do not think it is appropriate."

[Image source=AP Yonhap News]

Accordingly, market attention is focused on whether rate hikes will resume at the July FOMC. However, Powell said, "Today's decision is limited to this meeting," and "No decisions have been made regarding the July FOMC. It will be a live meeting," giving a cautious response. Regarding the basis for future rate hikes, he said, "I will look at the overall picture of what is happening in the economy and make judgments." When asked if rates need to rise to 6%, he mentioned the labor market's remarkable resilience and replied, "I cannot say for sure either."

Four Remaining Meetings This Year... Criticism of "Unrealistic Dot Plot"

On Wall Street, while the hold decision met expectations, the dot plot was widely viewed as somewhat hawkish. Investment bank RCB commented, "It is surprising that 12 out of 18 members expect more than 0.5 percentage points of additional tightening this year." Ed Moya, senior market analyst at OANDA, interpreted, "The policy statement and outlook (dot plot) are very hawkish, but Powell's somewhat ambiguous answers at the press conference about a July hike are somewhat optimistic."

Considering there are only four remaining FOMC meetings this year, some criticize the dot plot as somewhat unrealistic. French bank Cr?dit Agricole analyzed, "The hawkish message in the dot plot was intentionally presented to prevent financial conditions from becoming excessively loose due to the rate hold," adding, "A 0.25 percentage point hike is possible, but a 0.5 percentage point hike seems unlikely." Anna Wong, economist at Bloomberg Economics, predicted, "The Fed will likely hike less than the new dot plot suggests this year." Jeffrey Gundlach, CEO of DoubleLine Capital, known as the 'Bond King,' warned of a recession on CNBC's Closing Bell, saying, "If the Fed follows that path (as per the dot plot), it will break something."

On the day, the New York stock market closed mixed, with only the Dow Jones Industrial Average falling among the three major indices. The three major indices, which all fell sharply immediately after the more hawkish-than-expected dot plot release, later saw a rebound in the S&P 500 and Nasdaq due to doubts about the dot plot's feasibility and Powell's ambiguous answers. Among individual stocks, Nvidia, fueled by the artificial intelligence (AI) boom, rose nearly 5% again that day. Tesla, which had recorded the longest rally of 13 trading days until the previous day, closed lower.

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