Market Watch: U.S. Faces Dilemma as FOMC Meeting Hints at Delayed Rate Cut

The first Federal Open Market Committee (FOMC) meeting of the year in the United States is set to take place on January 30-31 (local time). The year’s first U.S. benchmark interest rate will be announced in the early hours of February 1, Korean time. While the market consensus is that this year will be the beginning of an interest rate cut, the timing seems to be getting later and later. The strong recovery of the U.S. economy has led to a growing “early rate cut” prudence.

The current U.S. benchmark interest rate stands at 5.25-5.50%. After raising the rate by 25bp in July last year, the rate has been frozen for three consecutive times. The market predicts the rate will remain frozen at this week’s FOMC meeting.

The Federal Reserve’s “hawkish” message of prudence regarding monetary policy changes and recently released economic indicators suggest that a U.S. rate cut is unnecessary.

The U.S. economic growth rate for last year’s fourth quarter, announced on January 25 (local time), was tallied at an annual rate of 3.3% (flash estimate). This is a somewhat slower figure than the previous quarter (4.9%). Still, it significantly outperformed the Wall Street Journal’s (WSJ) forecast of 2% and the Federal Reserve officials’ estimate of the U.S. potential growth rate of about 1.8%.

Consumption, backed by a robust labor market, drove U.S. economic growth. Personal consumption increased by 2.8% in the fourth quarter, contributing 1.91 percentage points to the growth rate. This broke market experts’ predictions that consumption would cool off in earnest from the fourth quarter.

The New York stock market rose as the possibility of a soft landing for the economy increased. On the same day, the S&P 500 and Nasdaq indices closed higher for six consecutive trading days on the U.S. New York Stock Exchange. In particular, the S&P 500 index recorded all-time highs for five consecutive trading days. Dow Jones Industrial Average (DJIA) also rebounded.

Employment in the U.S. is also solid. The U.S. unemployment rate is at 3.7%, below the potential unemployment rate, and the number of non-farm new employees in December increased by 216,000 compared to the previous month. The January U.S. manufacturing and service Purchasing Managers’ Index (PMI) exceeded estimates (47.9, 51), recording 50.3 and 52.9, respectively.

Due to the robust economic strength of the U.S., the Federal Reserve’s interest rate freeze stance is likely to be prolonged. The Chicago Mercantile Exchange (CME) Group’s FedWatch predicts a 97.9% chance of a rate freeze at the January FOMC meeting. The possibility of a rate cut in March has dropped below 50%, down from 75.6% a month ago.