[FOMC] Like Volcker... Powell: "No Rate Cuts Until Inflation Is Under Control"

Additional Giant Step Screening

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] "First of all, I want to clarify that my main message has not changed since the Jackson Hole Forum."

Jerome Powell, Chair of the U.S. Federal Reserve (Fed), opened his remarks this way in response to the first question, "When will you lower interest rates?" at a press conference held immediately after deciding on a third consecutive giant step (0.75 percentage point rate hike) on the 21st (local time). It seemed he wanted to preemptively address concerns that the market might selectively interpret only the messages it wanted to hear.

He emphasized, "We are determined to bring inflation down to the target," and "we will keep at it until the job is done." This expression, reminiscent of the title of former Fed Chair Paul Volcker’s autobiography, "Keeping At It," was previously used by Powell at the Jackson Hole Forum. It clearly signaled once again that he intends to respond in the Volcker style, not like Arthur Burns in the 1970s who hesitated to raise rates amid recession fears and thus fueled inflation.

◇ Will There Be a Fourth Consecutive Giant Step?

The Fed’s giant step on this day had been anticipated early on. What surprised the market was not the size of the rate hike but the more hawkish-than-expected dot plot. With a median year-end rate of 4.4% presented, it suggested that an additional 1 to 1.25 percentage point increase could occur in the remaining two Federal Open Market Committee (FOMC) regular meetings.

Among the 19 FOMC participants, 9 projected a year-end rate of 4.25?4.50%, and 8 projected 4.00?4.25%. Considering recent inflation concerns, this is interpreted as a forecast for another giant step. To raise rates by 1.25 percentage points within this year, the two scheduled FOMC meetings would need to raise rates by 0.75 percentage points and 0.5 percentage points respectively. If a 0.75 percentage point hike is decided at the November meeting, it would mark four consecutive giant steps.

Investment bank Morgan Stanley analyzed, "The year-end dot plot means that a 0.75 percentage point hike in November and a 0.5 percentage point hike in December are almost certain." Citibank also said, "The dot plot is more hawkish than expected," and revised its rate forecast upward, expecting hikes of 0.75 percentage points in November, 0.5 percentage points in December, and 0.25 percentage points in February, with the terminal rate reaching 4.5?4.75%.

However, if upcoming inflation data confirm a peak, the possibility of two big steps (0.5 percentage point hikes) or a combination of giant and baby steps (0.25 percentage point hikes), as suggested by 8 participants, cannot be ruled out.

◇ Powell Invokes Volcker, Will Terminal Rate Hit 5%?

With continued high-intensity tightening, the possibility of the terminal rate reaching 5% next year was also raised. Six FOMC participants projected a year-end rate of 4.75?5% for next year. Bank of America (BoA) also presented the same outlook.

Especially, Powell’s statement at the press conference that "we will not consider lowering rates until we are fully confident that inflation is moving down toward the 2% target" adds weight to the prospect of continued high-intensity tightening. He emphasized, "It is necessary to raise the policy stance to a restrictive level to exert meaningful downward pressure on inflation."

The phrase "keep at it," used by Powell to express his tightening resolve, effectively summons former Chair Volcker, famous as an "inflation fighter." Like Volcker, who endured harsh rate hikes up to the 22% range despite mounting recession fears and opposition, Powell confirmed his intention to endure pain and continue tightening policies. This clearly draws a line against market speculation about possible pace adjustments and signals a different path from former Chair Arthur Burns.

Additionally, Powell acknowledged the economic repercussions by saying, "The possibility of a soft landing may diminish." He explained that the reason for not implementing a 1 percentage point hike was, "I did not want to overreact to a single data point (August CPI)." Regarding housing cost inflation, which has been a concern, he predicted it would remain at a fairly high level for some time.

◇ U.S. Economic Growth Forecast Downgraded to 0.2%

On the same day, the Fed presented in the Summary of Economic Projections (SEP) that the year-end inflation forecast was raised to 5.4%, up from 5.2% in June. Inflation is expected to decline to 2.8% by the end of next year, 2.3% by the end of 2024, and reach the target of 2% by the end of 2025.

On the other hand, the economic growth forecast was sharply downgraded. The forecast for this year dropped by a significant 1.5 percentage points from 1.7% to 0.2%. The year-end unemployment rate forecast was raised to 3.8%, up from 3.7% in June. It is expected to rise to 4.4% next year.

Goldman Sachs evaluated the economic outlook released on this day as "containing a message similar to the Jackson Hole Forum, which said inflation is very high and pain is necessary to reduce it."