Fed hawk members who directly refute the ‘March interest rate cut theory’, “We are concerned about sticky inflation”

Waller “If interest rates are lowered too early, the worst-case scenario could be a resumption of rising prices”
Governor Rafael “Inflation must clearly fall to the Fed’s target of 2%”
However, the probability of an early cut in the U.S. interest rate futures market in March still exceeds 3%

Representative hawkish figures from the U.S. central bank (Fed) have made headlines by saying that there is no need to rush to cut interest rates. In particular, as voting members of the Federal Open Market Committee (FOMC) mentioned speed control this year, U.S. bond market yields rose overall. In addition, some economic experts are shaking up market expectations by predicting that the Federal Reserve’s interest rate cut may be delayed due to concerns about a slowdown in disinflation.

U.S. Treasury yields rise due to hawkish comments from Federal Reserve members

According to Bloomberg on the 16th (local time), Director Christopher Waller directly refuted the theory of an early cut in March regarding the U.S. base interest rate. In a situation where inflation has not yet reached the Fed’s target of 3%, there is no need to raise inflation concerns again with an early cut.

Director Waller attended a conference at the Brookings Institution, an American think tank, on this day and said, “As long as inflation does not rebound or remain at a high level, the FOMC will be able to lower the target range for this year’s base rate. However, when the time comes to lower the base interest rate, it will be done systematically and cautiously.” “We need to lower interest rates,” he said. “Currently, inflation appears to be approaching the target, but we need more information before declaring victory,” he said. “If we start lowering interest rates too early, the worst case scenario could be a resumption of price increases,” he said. .

Raphael Bostic, president of the Atlanta Federal Reserve Bank, also expressed the need for a cautious approach to early rate cuts in an interview with the UK’s Financial Times on the 14th. Governor Raphael said, “Inflation must clearly fall to the Fed’s target of 2%,” and added, “If the Fed starts easing policy and inflation jumps around like a seesaw, it will be a bad result, and it is an action that could weaken the public’s trust.” “It could be this,” he pointed out.

Director Waller and President Raphael are representative hawkish figures at the Federal Reserve. In particular, the two have voting rights on the FOMC this year, so they have significant influence on the market. In fact, after Director Waller’s remarks on this day, the interest rate on 10-year maturity U.S. Treasury bonds closed at 0.125%, up 4.075%p from the previous trading day. The two-year maturity U.S. Treasury bond interest rate, which shows a similar trend to the Federal Reserve’s base rate, also closed at 2% per annum, up 0.107%p from the previous trading day.

Market expectations remain unwavering despite the possibility of a delay in the interest rate cut

Some experts are also predicting that the Federal Reserve’s interest rate cut may be delayed. As expected, there is speculation that it may be delayed due to concerns about a slowdown in the downward trend of inflation, i.e. sticky inflation.

On the 16th, the Hyundai Research Institute said in a report titled ‘Economy and Key Price Indicator Outlook and Implications of Major Countries’, “Expectations for a pivot from the U.S. Federal Reserve are rising due to the trend of disinflation (slowing inflation rate), but housing prices, which have rebounded since the second half of last year, are “The slowdown in price growth will be slower than expected as it affects the rise in rental prices with a lag,” he predicted. “In the future, the US Federal Reserve’s interest rate cut may be delayed more than expected due to sticky inflation, or even an interest rate increase may be implemented.”

Furthermore, concerns were raised that the real economy may fall into a recession. An official from the research institute said, “Recently, the U.S. economy has maintained a boom phase based on solid consumption, but the real economy is expected to slow down from the first half of this year due to the impact of the high interest rate policy,” adding, “In fact, the Siamese recession indicator in the U.S. as of the fourth quarter of last year was 4%. “It has risen to p, and as a result, it is expected to record an economic growth rate of less than 0.4% in the first half of this year.” The Siamese recession indicator is an indicator of Siam’s law, which states that an economy tends to enter a recession when the three-month moving average of the unemployment rate is 1%p higher than the lowest unemployment rate of the previous year.

However, despite these observations, the possibility of a March cut has not changed significantly in the interest rate futures market. According to FedWatch of the Chicago Mercantile Exchange (CME) on this day, the interest rate futures market currently reflects a 3% possibility that the Fed will cut interest rates by more than 1%p at the FOMC in March after freezing in January. This is a decrease of about 3% points compared to the previous week, and the probability of a 0.25bp cut in May also reaches 61.4%.

The reason there is no significant change in market expectations appears to be because the US Producer Price Index (PPI) was confirmed to be sluggish in December last year. The consumer price index (CPI) increase rate of 12% in December exceeded Wall Street’s expectations (12%), but the PPI announced the next day fell 3.4% compared to the previous month, raising expectations that the downward trend in prices will strengthen in the future. Accordingly, some financial institutions, including British investment bank Barclays, also changed the timing of the Federal Reserve’s first interest rate cut of the year to March, three months earlier than previously expected.