This Week's FOMC Focuses on 'Hawkish Powell'... Will Interest Rate Hikes Be Mentioned?

This week, the Federal Open Market Committee (FOMC) of the U.S. Federal Reserve (Fed) will hold a meeting to decide the benchmark interest rate. Amid the unexpectedly strong inflation this year, Chairman Powell is expected to make hawkish (favoring monetary tightening) remarks, and some speculate that a rate hike could be mentioned. As the timing of the Fed's rate cuts remains uncertain, the monetary policy calculations of other regional central banks, including the European Central Bank (ECB), are expected to become even more complicated.

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According to the Fed on the 28th (local time), the third FOMC meeting of the year will be held from the 30th of this month to the 1st of next month.

It is almost certain that the Fed will maintain the benchmark interest rate at the current highest level in 23 years, 5.25?5.5%, at this meeting. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds futures market on that day reflects over a 97% probability that the Fed will keep the benchmark rate unchanged at the upcoming FOMC.

The key point to watch in this FOMC is how hawkish Chairman Powell's message will be. In January, Powell stated that further confidence in the continued slowdown of inflation was needed, but inflation has been strong this year, exceeding market expectations for three consecutive months. The core Personal Consumption Expenditures (PCE) price index, the inflation indicator most valued by the Fed, rose 2.8% year-on-year in March, surpassing the expert forecast of 2.6%. On the other hand, the U.S. real Gross Domestic Product (GDP) growth rate for the first quarter was 1.6% quarter-on-quarter, significantly below the market forecast of 2.5%, increasing fears of stagflation (rising prices amid economic slowdown).

At last month's FOMC, the Fed maintained its forecast of three rate cuts this year, but the market is now anticipating only one cut or even none within the year. There is also speculation that Chairman Powell might mention the possibility of a rate hike at this week's FOMC.

Anna Wong, an economist at Bloomberg Economics (BE), Bloomberg's economic research institute, said, "We expect Chairman Powell to make a hawkish pivot," adding, "He is likely to signal fewer rate cuts than the originally forecasted three, and may even suggest that there might be no rate cuts." She also noted, "He might even hint at the possibility of a rate hike being on the table."

One reason inflation remains unchecked despite the Fed's restrictive monetary policy is the possibility of a rising neutral rate. The neutral rate is the theoretical interest rate level that neither stimulates nor restrains economic growth. At the March FOMC, the Fed estimated the neutral rate at 2.6%, but former U.S. Treasury Secretary Larry Summers, who has been continuously concerned about persistent high inflation, estimates it to be much higher, above 4%. Factors such as the U.S. government's fiscal deficit, expanded investment in clean energy, and the artificial intelligence (AI) boom are analyzed as leading to long-term economic growth and a rising neutral rate. Earlier, Robert Kaplan, President of the Dallas Federal Reserve Bank, also recently said, "The neutral rate may be higher, so interest rates might not be as restrictive as previously thought."

The prospect of prolonged high interest rates in the U.S. has increased the likelihood of complications in the monetary policy steps of other regions, including the European Central Bank (ECB), which had signaled a rate cut in June. James Knightley, Chief International Economist at ING Life in New York, analyzed, "The Fed's inflation problem is a global issue that other central banks cannot ignore," adding, "If the Fed cannot cut rates soon, the dollar will strengthen, which will stress the European economy and limit other central banks' ability to cut rates."

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