US Fed Raises Interest Rate to 5.5%... Will This Be the Last Hike This Year? (Update)

The U.S. central bank, the Federal Reserve (Fed), carried out the so-called 'baby step' by raising the benchmark interest rate by 0.25 percentage points as expected. This marks a resumption of rate hikes just one month after a pause for a 'breather.' With the U.S. interest rate ceiling soaring to 5.5%, the interest rate gap with South Korea has widened to a record high of up to 2.0 percentage points.

[Image source=Reuters Yonhap News]

On the 26th (local time), following the July Federal Open Market Committee (FOMC) regular meeting, the Fed announced in its policy statement that the federal funds rate would be raised from the previous 5.0?5.25% range to 5.25?5.5%. As a result, the U.S. benchmark interest rate has surged to its highest level since 2001. This is the 11th rate hike since the rate-hiking cycle began in March last year. After raising rates 10 consecutive times, the Fed unanimously decided to hold rates steady at the June FOMC to assess the cumulative effects of tightening.

The FOMC stated, "Recent indicators suggest that economic activity is expanding at a more moderate pace than before," and "The Committee is paying close attention to inflation risks." It also confirmed, "We will continue to assess incoming information and the effects of monetary policy," and "When determining the appropriate range of additional policy firming to return inflation to the 2% target, we will consider the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial conditions." The wording in the policy statement showed only slight improvements in nuance regarding economic assessment, changing some parts from 'modest' to 'moderate,' but overall remained similar to the previous month. The phrase 'additional policy firming' was also retained.

The baby step decision was made unanimously on the day. It was a result long anticipated by the market. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) futures market has priced in a baby step possibility at over 90% since early this month. At the June FOMC, the Fed held rates steady but indicated through the dot plot that two additional hikes could occur within the year.

The key now is the Fed's moves after the next meeting in September. As the Fed's tightening continues for a prolonged period, there remains a division among officials between hawks (who prefer monetary tightening) concerned about persistently high inflation and an overheated labor market, advocating for further hikes, and doves (who prefer monetary easing) who argue that excessive tightening could unnecessarily trigger a recession and that the lagged effects of cumulative rate hikes on the overall economy must be considered.

In particular, with clear signs of easing in inflation indicators including the recent Consumer Price Index (CPI), market expectations have even spread that the Fed's tightening cycle could end early with just one more hike this month. There are only three remaining FOMC meetings this year?in September, November, and December?with the next scheduled for September 19?20. Despite the dot plot forecasting two additional hikes, the rate futures market is predominantly betting that the tightening cycle could conclude with this single hike.

Currently, market attention is focused on Fed Chair Jerome Powell's remarks. Chair Powell is scheduled to hold a press conference at 2:30 p.m. Eastern Time shortly. With about two months until the next FOMC in September, all eyes are on what clues he might provide during this conference. Investors are likely seeking signals that rate hikes are nearing an end and hints about how long elevated rates might persist.

Some analysts suggest that Powell may refrain from giving a clear stance at this press conference and instead wait to review additional data before delivering a more definitive message at the Jackson Hole meeting at the end of August. This week, the Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, will also be released. The core PCE price index is expected to have risen 4.2% year-over-year, slowing from the previous month's 4.6%. If the PCE price index surprises the market with a strong reading, concerns about Fed tightening could rise again.

The interest rate inversion between the U.S. and South Korea (3.50%) has widened to a maximum of 2.0 percentage points. Given that such a gap is unprecedented, concerns are being raised about foreign capital outflows and increased volatility in the foreign exchange market. This could also pose a burden on the Bank of Korea, which has held rates steady four consecutive times from February to this month.

Following the release of the FOMC policy statement this afternoon, the New York stock market has continued to show mixed trends. So far, there has been no significant volatility. The Dow Jones Industrial Average, composed of blue-chip stocks, turned slightly positive just before the announcement. Meanwhile, the S&P 500 and Nasdaq indices have continued to decline.

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