Will the FOMC Raise Rates by 75bp Again Next Month After This Week?

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Junho] As the pressure for tightening increases ahead of the first stock market in May, attention is focused on the upcoming U.S. Federal Open Market Committee (FOMC) meeting this week. The key issue is whether the Federal Reserve (Fed) officials will take a giant step (75bp) to curb soaring inflation.

Heo Jin-wook, a researcher at Samsung Securities' Global Macro Team, stated in a market outlook report on the 1st, "The market is pricing in a low possibility of a 75bp hike and expects an official announcement of a 50bp rate hike along with quantitative tightening (QT)."

He explained, "Recently, James Bullard, President of the Federal Reserve Bank of St. Louis, repeatedly emphasized the necessity of a 75bp hike, which has somewhat heightened market caution," but "at least 2 to 3 FOMC participants have expressed skeptical views on a 75bp hike, so the possibility of a 75bp increase is considered low."

However, he expects QT to begin. It is forecasted that over the next 2 to 3 months starting next month, the monthly asset reduction scale will gradually increase to $95 billion (Treasuries $60 billion, MBS $35 billion). Although the duration of QT and the final target asset size will not be specifically mentioned, Heo expects "the Fed's asset size to shrink from the current 37% of GDP to the pre-pandemic level of about 20%." This implies that over the next approximately three years, the current $9 trillion asset size will be reduced to around $6 trillion by mid-2025, after which QT will end.

Despite this, he emphasized that market attention should focus on the possibility of a 75bp hike in June and any nuance changes from Fed Chair Jerome Powell. Samsung Securities expects that after two consecutive months of 50bp hikes this month and next, the remaining four hikes in the second half of the year will be 25bp each, aiming for the overall interest rate to reach 2.5% (upper limit) by the end of this year.

Heo said, "Samsung Securities also judges that the possibility of a 75bp hike next month is not high," adding, "There is skepticism about a '75bp rate hike' consensus within the FOMC," and "because it is expected that the peak of inflation in March, based on year-over-year growth rates, will gradually be confirmed."