Fed Turns More Dovish... Heungkuk Securities: "Rate-Cutting Cycle Likely to Continue Next Year"

Heungkuk Securities stated on December 11 that the US Federal Reserve (Fed) is expected to cut interest rates again next year. While the direction of monetary policy will be determined based on new economic indicators, the firm explained that the overall sentiment within the Federal Open Market Committee (FOMC) is likely to shift toward a more dovish stance, especially in relation to the appointment of the next chair.

Yonhap News Agency

At the December FOMC meeting, the Fed lowered its benchmark interest rate by 25 basis points (0.25 percentage points), marking the third consecutive rate cut since September. The target range for the federal funds rate was reduced to 3.50-3.75%. Kim Jinseong, a researcher at Heungkuk Securities, noted, "This rate decision saw a split vote with nine in favor and three against." He added, "Fed Governor Stephen Miran advocated for a 50 basis point cut, emphasizing the need for a faster reduction, which highlighted the ongoing divergence of views among committee members."

He continued, "The Fed maintained its assessment that the US economy is continuing a moderate expansion, but acknowledged that job growth is slowing, the unemployment rate is rising, and that downside risks to employment have increased in recent months." He further stated, "Regarding inflation, the Fed assessed that it has been on the rise since the beginning of the year and remains somewhat above the target level."

He also assessed that Fed Chair Jerome Powell made dovish remarks. He explained, "While financial markets anticipated a rate cut in December, there were concerns about a 'hawkish cut' and its potential aftermath. However, the press conference comments-such as the downside risks in the labor market despite solid growth, a forward-looking outlook on inflation, and the absence of any calls for rate hikes-were overall more dovish than initially feared."

Heungkuk Securities projected that the Fed’s rate-cutting cycle is likely to continue through 2026. He said, "The timing and pace of rate cuts remain flexible, but there is a high possibility of two cuts in the first half of the year," adding, "By the end of next year, the upper bound for the final policy rate is expected to be 3.25%."