Fed to Cut Rates Twice Next Year Instead of Four Times, Inflation to Rise from 2.1% to 2.5%... "New Phase for Rate Cuts"

Inflation Forecast for Next Year Raised from 2.1% to 2.5%

US GDP Growth Rate Slightly Increased from 2% to 2.1% Next Year

Powell: "Rate Cut Pace Will Slow Down"

"The pace of inflation deceleration is not as significant as expected... The US economy is growing faster than anticipated in September."

These are the repeated remarks of Jerome Powell, the Chairman of the US Federal Reserve (Fed), during a press conference held right after the FOMC on the 18th (local time). On this day, the Fed held the December Federal Open Market Committee (FOMC) and lowered the benchmark interest rate by 0.25 percentage points annually. However, Powell's remarks imply that the US economy is stronger than expected, and inflation is not coming down easily, making it inevitable to be more cautious about rate cuts. Consequently, the year-end benchmark interest rate is projected to be 3.9%, up 0.5 percentage points from the 3.4% expected in September. The news that the Fed will lower the benchmark interest rate less than expected next year led to a sharp decline in the New York Stock Exchange.

"We Must Move Cautiously from Now On"

The Fed predicted through the economic outlook forecast (SEP) that the US economy next year will be much stronger than previously expected. The real Gross Domestic Product (GDP) growth rate of the US was slightly raised from 2% in September to 2.1%. Inflation is expected to be 2.5% by the end of next year, higher than the 2.1% in September. The unemployment rate for next year is expected to be 4.3%, 0.1 percentage points lower than during the September FOMC meeting.

Chairman Powell also explained that "the US economy is very solid" and "the reason for the slowdown in the pace of inflation reduction is because the economy is growing faster."

Accordingly, Chairman Powell stated that the Fed's monetary policy has "entered a new phase." Although rate cuts were initiated with the belief that inflation is slowing down, the stronger-than-expected economic situation means that monetary policy will be operated more cautiously than before.

In response to the question of whether the criteria for changing rates are different or higher than before, he replied, "We can say that we have entered a new stage." He also stated, "We have moved quite quickly (with rate cuts) to this point, and the pace will certainly slow down in the future."

Benchmark Interest Rate Forecast Raised

In fact, Fed members are showing much more caution regarding monetary policy than a few months ago. This is interpreted as a sense of crisis that inflation could potentially surge again. According to the dot plot, which shows the rate hike forecasts of FOMC members, 10 out of 19 members forecast next year's rate to be between 3.75% and 4.0%. Four members forecast it to be above 4.0%, while the remaining five see it below 3.5%.

Accordingly, the Fed presented the year-end benchmark interest rate (median) as 3.9%, 0.5 percentage points higher than the September forecast of 3.4%. If the Fed cuts the benchmark interest rate by 0.25% annually, four cuts were expected next year based on September, but now the number is expected to decrease to two.

The Fed expects the benchmark interest rate at the end of 2026 to be 3.4% (2.9% in September) and at the end of 2027 to be 3.1% (2.9% in September), both raised from September.

New York Stock Exchange Plummets

The New York Stock Exchange closed sharply lower on the prospect that the pace of additional rate cuts by the Fed will slow down.

The Dow Jones Industrial Average fell 1,123.03 points (2.58%) to 42,326.87 compared to the previous session. The S&P 500 index fell 178.54 points (2.95%) to 5,872.16, and the tech-heavy Nasdaq Composite index closed at 19,392.69, down 716.37 points (3.56%).

US Treasury yields surged to their highest level in six months. The yield on the 10-year US Treasury note was 4.52% as of 4:20 PM on the 18th (local time), up 12 basis points (1bp = 0.01 percentage points) from the close of the New York Stock Exchange the previous day. This is the highest level in six months since early June.

New York = Park Shin-young, Correspondent nyusos@hankyung.com