Will the benchmark interest rate be held steady or raised further? Ahead of the monetary policy decision in June, a division within the U.S. Federal Reserve (Fed) has been confirmed, with some arguing that two additional rate hikes are necessary within this year. This is due to inflation not falling as much as initially expected despite more than a year of tightening measures. Even officials who had supported holding rates steady in June left room for further tightening, stating that pausing rate hikes next month does not mean the tightening cycle is over.
According to Bloomberg and others, James Bullard, president of the Federal Reserve Bank of St. Louis and a prominent hawk within the Fed, said on the 22nd (local time) at a forum held in Fort Lauderdale, Florida, "To exert sufficient downward pressure on inflation and bring it back to the target (2%) in a timely manner, policy rates need to be raised further."
Bullard expressed support for a 0.5 percentage point rate hike, stating, "I think we need to raise rates two more times this year (by 0.25 percentage points each time)." If this happens, the U.S. benchmark interest rate would jump from 5.0-5.25% to 5.5-5.75%. This figure far exceeds the year-end rate forecast of 5.1% (median) presented in the March dot plot.
He argued, "The 5.1% median is based on expectations of slow growth and improving inflation," adding, "We need to fight inflation while the labor market is strong." He continued, "Core inflation indicators have not changed significantly in recent months. Households remain affluent, which will support consumer spending," emphasizing, "If inflation is not controlled, the Fed will need to take more action."
Contrary to the Fed's indication at the May Federal Open Market Committee (FOMC) meeting that rates might be held steady going forward, numerous Fed officials have recently made remarks supporting further tightening. Besides Bullard, other hawks such as John Williams, president of the New York Fed and considered the Fed's third-ranking official, Raphael Bostic of the Atlanta Fed, Loretta Mester of the Cleveland Fed, and Michelle Bowman have all hinted at a rate hike in June. Last week, even Lori Logan, president of the Dallas Fed and regarded as a moderate, dismissed the idea of holding rates steady anytime soon given recent economic data, raising market concerns about continued tightening.
Additionally, Neel Kashkari, president of the Minneapolis Fed, who had previously supported holding rates steady in June, also left room for further tightening. Appearing on CNBC's Squawk Box, Kashkari said, "It's a close call whether to raise rates in June or skip it," warning, "Skipping a rate hike in June does not mean the tightening cycle is over." This signals that the Fed could resume rate hikes at any time depending on inflation and other economic conditions.
In particular, Kashkari stated, "If you ask whether we could start raising rates again in July, I would say that is possible," emphasizing, "The most important thing is that we do not completely remove that option from the table." He also hinted that rates could be raised into the 6% range if inflation does not decline further.
This stance contrasts sharply with market expectations of a June hold. According to the Chicago Mercantile Exchange (CME) FedWatch tool, as of this morning, the federal funds futures market reflects about a 68% probability that the Fed will hold rates steady in June. Although this is lower than the 82% probability from the previous day and 79% from a week ago due to the series of hawkish Fed officials' remarks, it remains a high level. The probability of an additional "baby step" (a 0.25 percentage point rate hike) stands at around 31%.
The next FOMC meeting where the U.S. monetary policy decision will be made is scheduled for June 13-14. This week, several Fed officials, including President Logan and Susan Collins of the Boston Fed, are scheduled to speak, drawing attention to whether hawkish remarks supporting further hikes will continue as they did last week. Economic indicators such as the May FOMC minutes, the April PCE price index (a key inflation gauge monitored by the Fed), the revised first-quarter GDP growth rate, and the preliminary May S&P Global PMI will also be released in succession. Investors are expected to use these data to gauge the Fed's future monetary policy path. The April core PCE, to be announced on the 26th, is estimated to have risen 4.5% year-over-year and 0.3% month-over-month.
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
