Kiwoom "High Possibility of Final Rate Hike at July FOMC"

"Possibility of Additional Increase to Be Decided Ambiguously"

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The U.S. Federal Reserve (Fed) is likely to maintain a pause after raising interest rates in July, according to an analysis. This is based on the judgment that further rate hikes could burden the real economy.

Yeha Ahn, a researcher at Kiwoom Securities, stated, "The Federal Open Market Committee (FOMC) is expected to raise the policy rate to 5.25?5.50% in July," adding, "The July FOMC is likely to be the last rate hike decision."

Ahn explained, "In the past, the Fed has stopped raising rates once they exceeded the inflation level, so the room for further hikes is limited," and forecasted, "Although the terminal rate level may be revised upward from expectations, the future rate path will not change significantly."

This is because the capacity for additional hikes may gradually decrease when considering the dual goals of financial stability and price stability. Although inflation still exceeds the target, the absolute level of inflation has significantly declined. The market expects inflation to reach the 3% range in the second half of the year. While there are concerns about prolonged medium inflation levels, this is not a factor that would expand the room for further hikes.

Additionally, there is concern that if high interest rates persist for a long time, a process confirming weak demand will occur in the second half of the year. This implies an environment where financial instability concerns may arise frequently.

Ahn pointed out, "In the past, market interest rates fell from the final stages of rate hikes, but recently, ambiguous patterns have continued, maintaining a high interest rate environment," adding, "The 10-year U.S. Treasury yield frequently approaching 4% raises liquidity squeeze concerns similar to the SVB crisis in March."

She explained that the longer rate hikes continue, the more appropriate it is to maintain expectations for future rate cuts.

However, Ahn noted, "After the July rate hike decision, the Fed will leave room to decide based on data, making the possibility of further hikes ambiguous." The July FOMC will not release an economic outlook like in June, so Fed Chair Jerome Powell's remarks will be the only hawkish tool.

Ahn added, "While demonstrating the Fed's determination through the rate hike, it is expected to express tightening intentions by maintaining the wording of the statement."

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