Fed Hikes Interest Rates for First Time in 3 Years

The U.S. Federal Reserve (Fed) raised its benchmark interest rate by 25 basis points (0.25 percentage points), adjusting the rate range from 3.75% to 4%. This marks the first rate hike in three years, and the market confirmed a stronger-than-expected hawkish stance in the Fed's remarks. The Fed Chair expressed a strong commitment to curbing inflation after the rate hike.

This reaffirms the Fed's position that price stability is its top priority. The market is weighing the possibility that the Fed will continue its tightening policy with greater intensity than anticipated.

This decision clearly demonstrates the Fed's policy direction to respond to robust U.S. economic growth and persistent price pressures. Market vigilance regarding the possibility of further rate hikes has also increased.

In particular, the Fed Chair's remarks imply that inflation is not a temporary phenomenon and that it may take a considerable amount of time to reach the 2% target.

The decision to raise interest rates was unanimously approved 12-0 in the Federal Open Market Committee (FOMC) vote. This indicates that there is little disagreement within the Fed regarding the direction of monetary policy.

The cohesion of policy decisions also served to dispel controversies over the Fed's independence. It sent a signal to the market that the Fed is focusing on its primary goal of price stability, unaffected by external pressure.

The Fed's dot plot confirmed the possibility of additional interest rate hikes in the future. A majority of FOMC members believed that further hikes would be necessary even after this rate increase.

Additional hikes are expected by the end of this year, with the possibility of further increases early next year. However, a scenario of rate cuts is also included for 2028, reflecting flexibility in the long-term policy direction.

However, at the same time, the Personal Consumption Expenditures (PCE) inflation forecast was also revised upwards from 3.6% to 3.7%.

This reflects the Fed's perception that price pressures remain high amid sustained economic growth. A thorough analysis of the current situation, where growth and inflation rise concurrently, is required.

He emphasized the need for serious action to combat inflation.

The Chair indicated that the tightening stance would continue until a trend of decline is confirmed before reaching the 2% target. These remarks show that the Fed views the inflation problem very seriously and is willing to use strong policy tools to resolve it.

The market is preparing for the possibility that the high interest rate policy may be maintained longer than expected due to the Fed's firm stance.

He pointed out the phenomenon where market interest rates actually rose due to the 25bp hike.

Gundlach believed that a larger hike would end interest rate volatility sooner and send a clear signal to the market. His argument offers a different perspective on the Fed's gradual approach.

Former President Donald Trump demanded that the Fed quickly lower U.S. interest rates to below 1%. He criticized the current interest rate level as no longer acceptable.

Trump's demands have sparked controversy, as they could infringe upon the Fed's independence. Unlike during Chairman Powell's previous tenure, this is interpreted as direct pressure on policy direction rather than direct criticism of specific individuals. Tension continues to exist between the Fed's decisions and the president's demands.

First, sustained strong economic growth. Second, intensified capital expenditure (Capex) competition due to a surge in AI infrastructure investment.

Third is persistent geopolitical risk. These factors suggest that upward pressure on Treasury yields may continue as they are unlikely to be resolved in the short term.

In particular, forecasts suggest that market difficulties could intensify if high interest rates persist through the second and third quarters.

The market currently expects approximately 1.9 additional rate hikes this year, with a high probability of an additional hike in December. The duration of the high interest rate environment, rather than the number of hikes itself, is the market's main concern.

The market expects the Bank of Japan (BOJ) to implement a 25bp interest rate hike. Recently, significant bets on a stronger yen have already been placed.

This is interpreted as the market having already priced in the BOJ's monetary policy change. Interest is also growing regarding the impact of Japan's rate hike on global financial markets.

The Fed diagnosed inflation as having "accumulated for too long and persisted at too high a level," clearly stating that it does not view it as a temporary phenomenon.

This perception is interpreted to mean that the Fed must continue its fight against inflation. Consequently, the market is adjusting its expectations, anticipating that the Fed's tightening cycle may be longer than expected.

Oil prices are expected to become the key variable for the future interest rate path. Unless oil prices fall, upward pressure on interest rates is likely to persist. While the market may interpret this positively in the short term, it ultimately forecasts that 10-year Treasury yields could rise again depending on oil price trends.

In particular, the escalating conflict between Saudi Arabia and Houthi rebels is acting as a factor preventing oil price declines. Geopolitical risks in the Middle East are cited as a major cause of increased oil price volatility.

The estimated 6-week timeframe for repairing Saudi Aramco pipelines also acts as a short-term upward factor for oil prices. Oil price movements are expected to significantly influence the Fed's monetary policy decisions.

An investment group collaborating with union pension funds is demanding the postponement of Anthropic's initial public offering (IPO) until regulations related to AI development and deployment are clarified. This reflects growing concerns about the safety and ethical issues of AI technology.

Mark Zuckerberg, CEO of Meta, expressed a different view, emphasizing the need for independent evaluation rather than slowing down AI development. He stressed the importance of AI technological advancement while acknowledging the need to find ways to ensure safety.

Meanwhile, former President Donald Trump is attempting to directly intervene in regulatory discussions by convening key AI figures for talks. There is a broad societal call for government-level regulation of AI technology.

These demands for IPO postponement and regulatory discussions are seen as attempts to find solutions to the social and ethical problems arising from the rapid development of AI technology.