Analysts predict that the lower bound of U.S. interest rates will remain firm next year. Despite the Federal Reserve cutting the benchmark rate by 25 basis points at December’s Federal Open Market Committee (FOMC) meeting, the move was seen as a hawkish reduction, heightening market uncertainty.
In a report released on Thursday, Eugene Investment & Securities analyst Kim Ji Na characterized the year’s final FOMC meeting as a typical example of a hawkish rate cut. She stated, “Although the Fed lowered the benchmark rate by 25 basis points, one committee member advocated for maintaining the current rates. Moreover, Chairman Jerome Powell’s statements, the dot plot, and economic projections, did not signal a favorable outlook for further cuts.”
Kim observed that although the market had anticipated a somewhat hawkish cut, Powell’s remarks were stronger than expected. She explained, “The message was clear that uncertainty surrounding future rate reductions has increased with higher inflation than expectations and the Trump risk.”
The uncertainty surrounding interest rate cuts is expected to intensify next year. Eugene Investment & Securities analyzes that there is a significant risk of upward revisions to both inflation forecasts and the terminal benchmark rate.
Kim projects, “The Fed will maintain its previous forecast of a 50 basis point cut next year, keeping the target rate at 4.0%. However, due to policy and economic uncertainties, the gap between potential cuts may widen, and the risk of being unable to implement further cuts will increase.”
Meanwhile, Kim anticipates that Korea’s commitment to an aggressive rate-cutting strategy will likely increase the interest rate gap with the U.S.
