Fed's Powell: "Discussion on Rate Cuts Has Become Visible"...Three Rate Cuts Expected Next Year (Update)

"Discussions on interest rate cuts have become visible." Jerome Powell, Chair of the U.S. Federal Reserve (Fed), officially signaled interest rate cuts next year. At the Fed's final Federal Open Market Committee (FOMC) meeting of the year, the interest rate was held steady for the third consecutive time, while the dot plot lowered the year-end interest rate forecast to 4.6% (median), suggesting the possibility of at least three rate cuts.

[Image source=Getty Images Yonhap News]

Chair Powell said at a press conference immediately following the December FOMC meeting on the 13th (local time), "Discussions on when policy easing (interest rate cuts) would be appropriate have become visible." He added, "(Interest rate cuts) are a topic being discussed worldwide and were also discussed at today's FOMC meeting," and "It will continue to be a key issue going forward."

At this meeting, the Fed kept the federal funds rate unchanged at 5.25?5.5%. This marks the third consecutive hold following the September and November FOMC meetings. Along with this, the newly released dot plot lowered the year-end interest rate forecast for next year to 4.6%. This signals the possibility of a total 0.75 percentage point cut, or at least three rate cuts, over the coming year.

During the press conference, Powell’s remarks showed a predominantly dovish (favoring monetary easing) tone. In response to the first question asking whether the addition of the word ‘any’ before the phrase about the scope of further policy tightening in the monetary policy statement meant 'no more rate hikes,' he replied, "It was added based on the recognition that rates have peaked or reached their limit."

Furthermore, Powell said, "I think the possibility of additional rate hikes is very low, but I do not rule it out," effectively acknowledging that the tightening cycle is nearing its end. He also stated, "We will maintain restrictive policy until we see clear evidence that we are moving toward the 2% inflation target," while emphasizing "rate hikes are no longer the baseline scenario as they were 60 to 90 days ago." He continued, "We need to lower rates before reaching 2% to prevent overshooting," confirming that the Fed is focused on the risk of excessive tightening or maintaining high rates for too long. Considering Powell’s usual tendency for ambiguous answers, this press conference was regarded as more dovish than expected.

On the same day, Powell said, "We are seeing strong growth ease and labor market balance being restored," diagnosing that the overheated labor market and strong economy, which had fueled inflation this year, are showing signs of cracks. He evaluated, "Job gains remain strong but are easing to a sustainable level," and "The era of extreme labor shortages is over." Regarding inflation, he repeatedly mentioned that both headline and core indicators have fallen significantly this year. However, he added, "It is too early to declare victory in the fight against inflation," and "Uncertainty remains high. We will proceed cautiously."

He distanced himself from the possibility of a recession. Powell said, "We cannot rule out the possibility," but assessed, "There is little evidence to suggest the economy is in a recession." When asked whether unexpectedly strong growth next year, similar to this year, could complicate decisions on rate cuts, he replied, "We will make policy decisions based on a comprehensive view," and "That alone is not a problem." However, he noted that it could take longer to reduce inflation, which might require maintaining higher rates for a longer period.

The three major indices of the New York Stock Exchange all surged in the afternoon following the Fed’s signal of rate cuts. During Powell’s press conference, gains expanded, currently recording increases in the 1% range. In contrast, government bond yields declined. The 2-year Treasury yield, sensitive to monetary policy, dropped more than 27 basis points to around 4.45%. This reflects the dovish interpretation of both the dot plot signaling three cuts next year and Powell’s press conference remarks.

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