"December FOMC Expected to Hold Rates Steady... Dot Plot Blocks Rate Cut Expectations"

"Year-end Market Interest Rates Expected to Slightly Rebound"

[Image source=Yonhap News]

The U.S. Federal Reserve (Fed) is expected to keep the benchmark interest rate (5.25%~5.50%) unchanged at the December Federal Open Market Committee (FOMC) meeting scheduled for next week, while focusing on curbing market expectations for a rate cut, according to analysis.

On the 8th, Ahn Yeha, a researcher at Kiwoom Securities, stated, "Considering that recent Fed officials have argued that the need for further hikes is low and the gradual easing trend of inflation, it is expected that the Fed will respond by holding rates steady rather than raising them."

Ahn pointed out that the key point to watch in this FOMC is whether there will be an adjustment in expectations for rate cuts. According to the current CME FedWatch, there are views expecting the benchmark rate to fall to 3.25%~3.50% by December 2024, which implies about five rate cuts.

So far, the Fed has adjusted market expectations when the market moves ahead in the monetary policy process. In fact, through the September FOMC dot plot, the Fed maintained this year's benchmark rate level at 5.6%, adjusting expectations for rate cuts. If rates are held steady this year, the benchmark rate will be at the 5.25%~5.50% level.

Ahn said, "Even if the Fed maintains the 2024 benchmark rate forecast at 5.1%, there is a possibility that market expectations for rate cuts will weaken. In particular, if the 2025 forecast, which was previously 3.9%, is revised upward to above 4.0%, the recent downward trend could be reversed."

Ahn expects the Fed to continue maintaining a tight environment and persist with a hawkish stance. This is because the decline in core inflation is limited due to factors such as housing prices and wages. Also, since it is still early to worry about an overall U.S. economic contraction given the recent expected turnaround in the manufacturing sector, the Fed is likely to continue high rates until it gains confidence that the target level has been reached through further inflation declines, even if this causes demand to slow.

Ahn concluded, "The Fed will adopt a policy that significantly weakens expectations for rate cuts while maintaining economic growth expectations for next year. Considering this, market interest rates are expected to rebound slightly toward the end of the year."