Despite Fed's 'Rate Freeze' Signal... Market Says '99% Chance of Cut in First Half'

More than three rate cuts this year

Recession concerns outweigh inflation

Wall Street "US will fall into negative growth"

Some say "Fed should be cautious in intervening"

Inflation exceeds target of 2%

Possibility of stagflation 'Recession vs Inflation'... Eyes on Powell's decision next month

Amid growing concerns about a US recession following the Trump administration's announcement of reciprocal tariffs, the market is increasingly expecting the US Federal Reserve (Fed) to cut the base rate next month. Although Fed officials continue to make hawkish (preference for monetary tightening) statements emphasizing inflation, the risk of recession is gaining weight, and the outlook for more than three rate cuts this year is becoming dominant.

◇Annual base rate of 3% forecast

According to the Chicago Mercantile Exchange (CME) FedWatch on the 7th (local time), the interest rate futures market sees an 86.3% chance that the Fed will cut the base rate more than three times this year. This is more than a 20 percentage point increase compared to the day before the reciprocal tariff announcement on the 1st. The Fed had previously predicted through the dot plot that it would lower rates twice by 0.25 percentage points by the end of the year, but the market expects this outlook to be revised upwards.

Even the possibility of more than four rate cuts this year has risen to 61%, an increase of about 30 percentage points over the same period. The possibility of five rate cuts was also tallied at 23.9%. This is more than three times the figure from a week ago (7.4%). If the US base rate, currently at 4.25-4.50% per annum, is cut by 0.25 percentage points five times, it will fall to 3-3.25% per annum.

The market is virtually certain that the Fed will cut the base rate in the first half of this year (May-June) with a 99.2% probability. This is 4.7 percentage points higher than the previous trading day and 23.6 percentage points higher than a week ago. On the other hand, the possibility of a freeze has plummeted from 24.4% to 3% over the same period.

This change is interpreted as a result of recession concerns spreading rapidly throughout the market rather than inflation. On this day, Goldman Sachs raised the probability of a US recession within the next 12 months from 35% to 45%. This is a revision from last month's increase from 20% to 35%. Goldman Sachs diagnosed, "As financial conditions tighten rapidly and policy uncertainty increases, corporate capital investment will shrink more than expected." UBS predicted that the US economy would fall into negative growth for two consecutive quarters due to the impact of reciprocal tariffs, and Barclays forecasted that the US economy would shrink by 0.1% this year.

Some argued that the US economy is already in recession. Larry Fink, CEO of BlackRock, the world's largest asset manager, said in a dialogue at the New York Economic Club, "Most of the CEOs I talk to say there is a high possibility that the US is currently in a recession," adding, "The economy is deteriorating at this very moment."

◇Fed in a dilemma

The Financial Times (FT) assessed that Jerome Powell, Fed Chairman, is caught in a dilemma between defending the economy and controlling prices due to the tariff war. Therefore, there is a cautious view that the Fed will not easily intervene in the market. This is because the inflation rate still exceeds the Fed's target of 2%, and additional price increases due to tariffs are expected. The possibility of stagflation, where inflation and recession occur simultaneously, is growing, making it difficult for the Fed to move hastily.

Accordingly, it is expected that the Fed will prioritize curbing inflation for the time being and will cut rates after confirming that the impact of the trade war is reflected in the real economy. Chairman Powell said on the 4th, "It is too early to talk about a policy shift," lowering expectations for Fed intervention in the market. He also said at a press conference after last month's rate freeze, "Some of the inflation is clearly due to tariffs," but "if inflation persists for a short period and prices naturally fall, we can watch without policy intervention."

Michael Gapen, chief economist at Morgan Stanley, also said in a Bloomberg TV interview, "Unless a recession occurs, it will be difficult for the Fed to ignore inflation," adding, "The Fed is unlikely to move for the time being."

Reporter Dayeon Lim allopen@hankyung.com