Looking at the minutes of the US FOMC… Experts “exceeding expectations of interest rate cuts within the year”

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Officials from the US Federal Reserve (Fed) predicted that the US economy could enter a recession from the second half of this year. As the rate of increase in consumer prices has also slowed, expectations for interest rate cuts are rising in the bond market, with the US Federal Reserve forecasting that it will cut interest rates three times within this year. On the other hand, experts predicted that the U.S. Federal Reserve would raise the base rate next month and then freeze it, saying that the expectation of a rate cut within the year was excessive.

According to the minutes of the March Federal Open Market Committee (FOMC) regular meeting released by the US Federal Reserve on the 12th (local time), officials at the Fed said the US economy could enter a “moderate recession” in the second half of this year. It was confirmed that there was a reference to This is the first time the Fed has acknowledged the possibility of a recession.

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Citing banking crises such as the bankruptcy of Silicon Valley Bank (SVB), Fed officials predicted that it would take about two years for the U.S. economy to emerge from a recession.

In addition, while the overall US banking system is robust and resilient, several committee members noted that they were unable to understand consumer sentiment following the banking crisis. In addition, it was evaluated that banks would have an impact on the overall economy, including employment and prices, while tightly managing household and corporate loans.

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Fed officials are divided on the future direction of interest rates. Some members supported a 0.25 percentage point increase, but others argued that a 0.5 percentage point increase was appropriate given high prices and solid data. On the other hand, some members argued that it was appropriate to temporarily freeze the benchmark interest rate until the impact of the banking crisis on the economy could be confirmed. Minutes revealed that Fed officials eventually decided to raise rates in light of inflationary pressures.

In addition, the Fed mentioned that it should use micro and macro policy tools such as liquidity provision and final lending tools to address the banking sector and financial instability.

US inflation shock

The market is reflecting three interest rate cuts within the year, predicting an economic recession despite the banks’ liquidity easing.

In this regard, market experts predicted that although the intensity of the Fed’s tightening would be reduced due to bank liquidity problems, inflation would determine the direction of future monetary policy given that the top priority is price stability.

The March US consumer price index (CPI), which was announced prior to the release of the March FOMC meeting minutes, rose 5.0% MoM, falling short of the market forecast (5.2%). This was the lowest in 1 year and 10 months since May 2021, confirming the slowdown in inflation. On the other hand, the core consumer price index rose 5.6% year-on-year, exceeding the overall consumer price index, indicating that it is still in a worrisome situation.

Lim Jae-kyun, a researcher at KB Securities, said, “The US inflation headline has confirmed a slowdown, but core inflation has risen higher than the headline, so the real base rate is still negative.” With the real base rate turning positive, and given that core consumer prices are still negative, the Fed is expected to raise the rate by 0.25 percentage points at the FOMC in May.”

He said, “The bond market is reflecting three interest rate cuts within the year, but as seen in the minutes of the March FOMC meeting, the Fed mentioned that price stability is a top priority despite the prospect of a mild recession at the end of the year.” The evaluation that it would take longer than this also shows the Fed’s will not to respond to the economy without price stability, and it seems that expectations of a rate cut within the year reflected in the market are excessive.”

Kyu-yeon Jan, a researcher at Hana Securities, said, “The fact that the US Fed is concerned about the ripple effect of credit tightening and is mindful of an economic downturn means that the interest rate hike cycle is not far off and the flexibility of monetary policy may increase in the future.” “Considering inflation, it is highly likely that interest rates will remain unchanged until the end of the year after one rate hike at the May meeting,” he said.

Source: Donga

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