The U.S. central bank’s policy-setting Federal Open Market Committee (FOMC) raised rates by 25 basis points at the conclusion of its two-day meeting, bringing its benchmark to a target range of 4.5% to 4.75%.
The markets expected a 25bps rise, which is another step downward for the Fed, which increased rates by 50 basis points in December, following four 75 basis-point hikes in 2022.
Along with the positive assessment of price stability, the necessity of continuing interest rate hikes was emphasized. In the statement, several wordings related to inflation were changed, with the addition of the phrase “inflation has moderated somewhat” and the “pandemic-induced imbalance between supply and demand, high food and energy prices, and widespread price pressure” that were cited as causes of inflation were removed.
At the FOMC, market participants were paying attention to the Fed's future path of interest rate hikes and the extent of the increase, with a statement revising the "pace" of future interest rates to the expression "extent," suggesting a 25bp hike would be the default.
Chairman Powell admits disinflation is entering its infancy but remains cautious.
In a press conference, Powell acknowledged that prices were stabilizing, saying, “We have entered the initial stage of disinflation.” However, unlike commodity prices, prices of services excluding housing and housing prices did not fall, so he maintained a cautious stance, saying that it was too early to declare victory over inflation.
In particular, in the case of service prices excluding housing costs, more than 60% of the labor market. As it is sensitive to slack, it is highly likely that a tight job market will support inflation, and it was emphasized that disinflation in service prices has yet to be confirmed.
It was noted that the Commission is discussing a couple more rate hikes in order for interest rates to reach a constrained level. It said that it is not thinking of lowering interest rates this year, and sought low growth, a gradual slowdown in the labor market, and a drop in inflation by maintaining high interest rates.
Expectations for easing monetary policy are valid for the time being, but the possibility of a rate cut is limited.
An analyst at Hana Securities said, "Despite Powell's press conference ending at the predicted level, the FOMC seems to be somewhat dovish," and "The market's expectations for the accommodative policy will continue as the conditions for the Fed to halt its tightening policy for the time being, such as the lower-than-expected employment cost index and stabilization of expected inflation, are in place."
However, considering that the bottom of oil prices is becoming solid, the weak U.S. dollar supports raw material prices, and that service prices may fall slowly as the Fed's concerns, the vigilance against prices could eventually emerge again in the second half.
In addition, contrary to the Fed's intention to keep interest rates at a restrictive level, the more optimistic the market expects a rate cut, the more room there is for the economy to improve and inflation to rebound.
An analyst at Hana Securities predicted, "The US Federal Reserve will maintain its previous forecast of raising the rate by 25bp in March and then freezing it at 5% by the end of the year."
