High Probability of Rate Freeze, but Fed May Cut Due to U.S. Recession Concerns

Korea Economic Daily

Summary

It was reported that the Fed's monetary policy decision has become more complicated due to the U.S. negative growth in Q1 ahead of the upcoming FOMC meeting.
Fed Chair Jerome Powell reaffirmed that it is not the time to consider adjustments to the policy stance while observing the economic situation.
Despite concerns about inflation due to tariffs, the possibility of the Fed's rate freeze is high, but a rate cut in June is suggested.

FOMC on 6-7 May... Deepening Concerns

Negative Growth in Q1 Amid Rising Prices

Fed Unlikely to Persist with Rate Freeze

The U.S. Gross Domestic Product (GDP) experienced negative growth in the first quarter of this year, complicating the Federal Reserve's (Fed) monetary policy decisions ahead of the Federal Open Market Committee (FOMC) meeting on May 6-7. The likelihood of a U.S. economic recession has increased, while inflation has risen compared to the previous quarter.

According to the U.S. Department of Commerce on the 30th, the U.S. growth rate in Q1 was -0.3%, but the Personal Consumption Expenditures (PCE) price index rose by 3.6% during the same period. This is a significant increase from the 2.4% rise in Q4 last year. PCE is an inflation indicator that the Fed closely monitors. Given the negative growth in Q1, the Fed may have to consider a rate cut, but rising inflation could pose a challenge.

Jerome Powell, the Fed Chair, had previously indicated such a situation. In a speech at the Chicago Economic Club on April 16, he warned, "Higher tariffs than expected by the Trump administration are expected to lead to price increases and slower growth," and "The Fed may face a difficult situation in choosing whether to focus more on prices or growth."

However, he reaffirmed the Fed's existing stance of observing the economic situation, stating, "We are well-positioned to wait for more clarity before considering any adjustments to our policy stance." According to the Chicago Mercantile Exchange (CME) FedWatch, the probability of maintaining the benchmark interest rate at 4.25-4.5% at the May FOMC is 94.8%.

Wall Street expects the Fed's political judgment to influence the May monetary policy. This is because the Fed has no reason to lower rates and take responsibility instead of the Trump administration in a situation where tariffs are fueling inflation.

However, the market believes that the Fed cannot continue to stick to a freeze. With the U.S. economic growth rate expected to be in the 0% range this year and the labor market slowdown becoming more pronounced, preemptive action through monetary policy is inevitable. FedWatch sees the possibility of a 0.25% rate cut at the June FOMC as over 60%.

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