"Fed Rate Cut Timing May Be Delayed Beyond Market Expectations"

Yonhap News Agency

On June 12, DB Securities released a report titled "Tariff Inflation: Too Early to Be Relieved," analyzing that ongoing uncertainty surrounding U.S. inflation could delay the Federal Reserve's policy rate cut beyond market expectations. However, iM Securities maintained its previous outlook that the Fed is still likely to resume rate cuts in September.

The U.S. consumer price index (CPI) for May rose at a much slower pace than expected. The headline index and the index excluding food and energy increased by only 0.08% and 0.13% month-on-month, respectively. This is a further slowdown compared to the monthly increase in April. While prices of some goods affected by tariffs rose, the pass-through to consumer prices has not yet become pronounced. The slowdown in consumption growth and stable service sector prices appear to have contributed to the low inflation rate.

Immediately after the May CPI announcement, President Trump stated, "The May CPI is a very good figure," and again pressed the Fed, saying, "The Fed should cut rates by 1 percentage point."

However, Park Sungwoo, an analyst at DB Securities, said, "It is still too early to conclude that tariff-induced inflation uncertainty under the Trump administration has been eliminated," adding, "The widespread increase in prices by companies in response to tariffs has not yet materialized."

The net percentage of companies planning to raise prices is rising in the National Federation of Independent Business (NFIB) survey. The recently released Fed Beige Book also showed that many companies are signaling future retail price increases.

Korea Investment & Securities predicted that the effects of tariffs imposed since April will become clearly visible as early as July.

As confirmed in the May employment data, the wage growth rate is rising again. The Trump administration's strong crackdown on illegal immigrants has increased the risk of supply-demand instability in the labor market, which could further accelerate wage growth.

Analyst Park stated, "While I believe that price increases due to tariffs will be temporary, I expect core inflation to temporarily rebound in the second half of the year as the trend of companies passing on costs to consumers spreads. Therefore, inflation uncertainty is expected to persist for the time being, and there is a risk that the timing of the Fed's policy rate cut will be delayed compared to current market expectations."

Most experts expect a rate cut in September. According to CME FedWatch on June 10 (local time), the interest rate futures market put the probability of a 0.25 percentage point cut by the Fed in September at 52.8%, higher than the probability of a hold at 38.9%.

Park Sanghyun, an analyst at iM Securities, said, "From the Fed's perspective, it will likely continue to monitor the outcome of tariff negotiations with major countries through early July, as well as the trend of companies passing on tariff increases to consumer prices after inventory depletion becomes apparent. Given that the current inflation trend is better than feared, the case for the Fed to resume its rate cut cycle is steadily building, so we maintain our outlook that the Fed will resume rate cuts in September."