[FOMC] Next Move Depends on Data... September Giant Step vs Speed Adjustment

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] ‘Three consecutive giant steps (0.75 percentage point rate hikes) or a slowdown.’ The next move of the U.S. Federal Reserve (Fed), which controls global monetary policy, now depends on ‘data.’ The pace of tightening will be determined based on when and at what level the signal that U.S. inflation, at its highest level in over 40 years, has peaked is confirmed.

Fed Chair Jerome Powell did not provide clear guidance on the size of future rate hikes during the press conference following the Federal Open Market Committee (FOMC) regular meeting on the 27th (local time). However, Powell left open the possibility of three consecutive giant steps by stating, "We could make an unusually large increase at the next meeting." He said, "Inflation has surprised us by rising over the past year," adding, "Further surprises could come."

In particular, Powell repeatedly emphasized that these decisions all "depend on the data." He said, "Although recent rate hikes have been rapid and large, we have not yet felt their effects," and "We want to see evidence that inflation will ease over the next few months." When asked about the possibility of a 1 percentage point hike, he replied, "We can answer that at the next meeting or the one after," stating that decisions will be made after reviewing the data.

The Fed’s target for the year-end benchmark interest rate is around 3.0?3.5%. This means that up to a 1 percentage point increase is possible in the remaining three FOMC meetings this year. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) futures market currently reflects the possibility of rate hikes of 0.5 percentage points, 0.25 percentage points, and 0.25 percentage points at the September, November, and December FOMC meetings, respectively.

The pace of Fed tightening is a hot topic among Wall Street investment banks and economists. Bank of America (BoA) said after the press conference that "the likelihood of the U.S. entering a recession in the second half of the year has increased," and expects a 0.5 percentage point hike in September. Citigroup predicted a 0.75 percentage point hike (in September) exceeding market expectations due to rising core inflation. James Knightley, ING’s chief economist, noted, "Inflation remains the Fed’s top priority," and "they are willing to sacrifice growth to achieve this."

On the other hand, Goldman Sachs assessed that "based on Chair Powell’s remarks, monetary tightening appears to have peaked." It explained that it is now time to slow down the pace. The New York stock market also focused on Powell’s dovish remarks that "at some point, it will be appropriate to slow the pace of rate hikes." After these remarks, major indices on the New York Stock Exchange all expanded their gains. The Nasdaq Composite, which is sensitive to interest rates and tech stocks, closed up 4.06% compared to the previous session.

On this day, Powell drew a line regarding recession debates. Citing a strong labor market, he said, "I do not think the U.S. is currently in a recession." The second-quarter Gross Domestic Product (GDP) figures, which can indicate whether the U.S. has entered a technical recession, will be released on the morning of the 28th.