Hana Securities "May Interest Rate Hold... Maintain Forecast of Two Cuts After September"

Hana Securities maintained its view that the U.S. will implement two interest rate cuts within this year starting from September, following the Federal Open Market Committee (FOMC) meeting in May where the interest rate was kept unchanged as the market expected.

According to Hana Securities on the 2nd, the U.S. Federal Reserve (Fed) unanimously decided at the May FOMC to keep the target range for the policy rate steady at 5.25?5.50% for the sixth consecutive time, in line with market expectations. From June, the Fed also decided to slow down the pace of balance sheet reduction. The limit on mortgage-backed securities (MBS) will be maintained at $35 billion, while the Treasury securities limit will be lowered from $60 billion to $25 billion.

Researcher Jeon Gyu-yeon said, "Fed Chair Powell emphasized in the press conference that the current interest rate level is sufficiently restrictive and indicated that the next policy decision would not be a rate hike. Given the increased uncertainty in the inflation path, he stressed maintaining a data-dependent stance and judged that keeping rates steady was appropriate as it may take longer than expected to gain confidence in inflation."

He added, "However, Chair Powell viewed a gradual decline in housing service prices, based on new rents, as highly likely and mentioned that rate cuts could be implemented if inflation continuously falls toward the 2% target or if the labor market unexpectedly deteriorates."

He continued, "Although there was no mention of the interest rate path for the rest of the year due to weakened confidence in inflation, the press conference was interpreted as somewhat dovish, providing relief to the market by considering the side effects of high-intensity tightening that could sharply slow the labor market."

Researcher Jeon evaluated, "The slowdown in quantitative tightening (QT) was somewhat expected. The MBS repayments are generally below the monthly limit even now, limiting the need for adjusting the cap, and since the Fed aims to maintain a Treasury-centered asset structure in the long term, the existing pace was maintained."

He further explained, "Compared to the March FOMC minutes where Fed officials discussed halving the Treasury securities limit, the current lower Treasury limit suggests that balance sheet reduction will proceed more slowly than expected. From this meeting, two possible paths for rate cuts can be envisioned: △ if employment remains strong, focus on inflation and gradually lower rates after stabilizing inflation, or △ if employment sharply deteriorates, respond immediately with rate cuts."

He concluded, "In either case, the possibility of rate cuts within this year appears high, and Hana Securities maintains its previous forecast that the U.S. Fed will implement two rate cuts starting from September within this year."