On the 19th, Korea Investment & Securities analyzed that the focus of monetary policy has shifted from inflation to employment following the 'big cut' decision at the September Federal Open Market Committee (FOMC) meeting.
The FOMC held a two-day meeting starting on the 17th and decided to lower the benchmark interest rate by 50 basis points (bp, 0.01 percentage points) to 4.75?5.00%. This was a big cut as the market had anticipated. However, Governor Bowman voted for a 25bp cut.
In the statement, the phrase regarding employment was changed from "employment growth has moderated" to "slowed." The assessment of employment was revised somewhat negatively. On the other hand, regarding inflation, the phrase "the Committee is more confident that inflation is steadily moving toward 2%" was added, reflecting a positive evaluation.
Researcher Namgang Lee stated, "The greater confidence among Committee members in achieving the inflation target due to recent inflation progress and the slowdown in employment acted as the background for the rate cut," adding, "Chairman Powell cautioned against investors' excessive optimism that the 50bp cut would become the new pace during the press conference."
The Summary of Economic Projections released together lowered the outlook for the benchmark interest rate. Based on the median of the dot plot, the benchmark rate is projected at 4.4% this year and 3.4% next year. These figures are downward revisions from 5.1% and 4.1% announced in June. The number of rate cuts is expected to be two more times this year and four times next year.
Regarding the reason for the downward revision, Researcher Lee pointed out, "It reflects the lowered inflation and raised unemployment rate forecasts." For core inflation (year-on-year in the last quarter), the projection for this year was revised down from 2.8% to 2.6%, and next year's forecast was lowered from 2.3% to 2.2%.
He added, "The projection adjustment reflects the expectation that monthly core inflation (month-on-month) will average below 0.19% going forward. Meanwhile, the unemployment rate forecast was raised from 4.0% to 4.4% this year and from 4.2% to 4.4% next year, reflecting the recent rise in unemployment. This suggests that Committee members expect the unemployment rate to exceed 4.4% in the first half of next year."
He continued, "This is evaluated as reflecting the Committee members' view that if a big cut is not made at this meeting, the upside risk to the unemployment rate could increase further."
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