It is predicted that the U.S. Federal Reserve System (Fed) will stop raising its key interest rate at the Federal Open Market Committee (FOMC) meeting in March. This is because inflation indicators are improving and signs of slowing economic growth are becoming more pronounced.
Reuters reported on the 29th (local time) that there is a 25% chance that the Fed will raise interest rates further after March, and that the market expects to cut interest rates as early as September. With a 0.25 percentage point increase in the benchmark interest rate at the FOMC meeting, which will be held from the 31st, the market predicts that the rate hike could end as early as March due to a slowdown in the pace of tightening.
What supports this outlook is slowing inflation. The U.S. Department of Commerce announced on the 27th that personal consumption expenditure (PCE) in December rose 5% year-on-year, down from 5.5% the previous month. Core PCE, excluding energy and food prices, also rose 4.4% from the same period last year, down from 4.7% in November.
The core PCE, which Fed Chairman Jerome Powell described as the “most accurate price indicator,” has been on a steady downward trend since it increased by 5.2% in September last year.
Other indicators also indicate that the inflation phase is coming to an end. University of Michigan’s expected inflation median for January, announced on the same evening, was 3.9%, down from 4.4% in December last year. It is the fourth consecutive month of decline.
Thanks to this, the market is confident of the Fed’s ‘baby step’ (increased 0.25 percentage point) this week. Jeffrey Roach, chief economist at LPL Financial, said, “As inflation cools, the Fed can ‘legally’ slow down the rate hike.”
On top of that, as indicators that the real economy, including the manufacturing industry, is recently announced, the observation that the Fed will soon stop tightening and start cutting interest rates in the second half of the year seems to be gaining momentum. According to the U.S. Supply Management Association (ISM) earlier this month, the Manufacturing Purchasing Managers’ Index (PMI) was 48.4 last month, below the standard of expansion and contraction of ’50’.
Paul Ashworth, an economist at Capital Economics, said, “With interest rate hikes weighing heavily on demand, core inflation is expected to ease again this year,” and predicted, “This will pressure the Fed to start cutting interest rates from the end of this year.”