Daol "May FOMC 25bp ↑... No Rate Cut Within the Year"

Daol Investment & Securities predicted that the Federal Open Market Committee (FOMC) would raise rates by an additional 25bp (1bp=0.01 percentage point) in May and maintain the interest rate at 5.25% through the end of the year. This aligns with Federal Reserve (Fed) Chair Jerome Powell's earlier statement that "there will be no rate cuts within the year."

On the 23rd, Daol Investment & Securities Research Center stated, "So far, the rapid rate hikes have produced a monetary tightening effect through banks, and if rates were to be cut at this point, the resumption of consumption could expand the inflation rebound."

On the 22nd (local time), the Fed raised the benchmark interest rate by 25bp. As a result, the upper bound of the U.S. benchmark interest rate rose from 4.75% to 5.00%. The economic growth forecast was lowered from 0.5% to 0.4% for 2023, and the 2024 forecast was also reduced from 1.6% to 1.2%. Regarding policy rates, there was no change for 2023 (5.1%), but the 2024 forecast was raised from 4.1% to 4.3%.

The Research Center cited "inflation concerns" as the reason for expecting no rate cuts within the year after the additional rate hike in May. Although credit tightening risks stemming from commercial banks have emerged, household consumer sentiment remains robust, and consumption data in the service sector has exceeded expectations.

The Research Center pointed out, "Initially, after directly increasing household income, consumption based on this income is activated, and the amount of consumer spending flows into others' income. The top 20% of service sector consumption activities continuously create leisure industry jobs for low-income groups."

It added, "For companies, under such an increase in aggregate demand, the hurdle for loan interest rates rises, encouraging continued investment." This implies that if bank risks are moderately resolved through micro-level policies, inflation risks could reemerge in the real economy.

The Research Center analyzed, "The Fed is paying attention to this point. Although the statement was changed due to uncertainty, the 2024 dot plot's rate level was raised, and the press conference was conducted more hawkishly than the statement, reflecting concerns about inflation risks."