FOMC 'Big Cut' Similar to September 2007... Recommendation to Respond with Curve Steepening

Hana Securities pointed out on the 19th that the decision to make a big cut (a 0.5% point reduction in the benchmark interest rate) at this Federal Open Market Committee (FOMC) meeting is similar to that of September 2007. They also advised responding to the steep yield curve (curve steepening).

[Image source=AFP Yonhap News]

The September FOMC cut the policy rate by 50bp (1bp = 0.01 percentage point), ending the previous eight consecutive freeze decisions. Accordingly, Kim Sang-hoon, a researcher at Hana Securities, stated, "This decision is quite similar to that of September 2007," adding, "At that time, it was also the first cut after a sharp rate hike, and during the blackout period, the market began to reflect a big cut like this one. The Federal Reserve ultimately decided to cut by 50bp from 5.25% to 4.75%."

He continued, "Furthermore, by the end of the year, an additional 25bp cuts were made twice, totaling a 100bp reduction. This is the same as the reflection in the futures market and the revised September dot plot," and forecasted, "Therefore, in the remaining two meetings until the end of the year, an additional 25bp cut will be made each time."

Researcher Kim said that market interest rate volatility could increase due to the upcoming Beige Book and unemployment rate. He added, "Nevertheless, considering that if more than five cuts are reflected, the first bottom is 3.41%, the long-term neutral rate estimate has been revised upward to around 3%, and the possibility of additional big cuts remains open, I recommend responding to curve steepening," and predicted, "The spread between the 2-year and 10-year U.S. Treasury bonds will primarily widen up to 20bp."

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