The Central Bank that sets U.S. currency policy, the Federal Reserve (Fed), kept the benchmark interest rate unchanged at 3.50% to 3.75% on the 17th (local time). It was the fourth straight hold since January.
The Fed cut the benchmark rate by 0.25 percentage point (P) for three consecutive meetings in September, October and December last year, then held rates in January, March and April this year and again this time. As a result, the rate gap with Korea (2.50% a year) remained unchanged at 1.25 percentage points at the upper end.
◇ Median dot-plot 3.4%→3.8% upward
Markets took the Fed's rate hold as a given. Attention therefore focused on how the Fed would project next year's rate level through the dot plot. The dot plot is a chart in which 19 Fed Commissioners anonymously mark their expected future policy rate levels with dots.
In the dot plot released that day, the Fed effectively scrapped expectations for a rate cut within the year. Commissioners put the median year-end policy rate at 3.8%. That is higher than the 3.4% presented at the March meeting.
Of the 18 who submitted year-end rate forecasts, only one expected a rate cut, while nine projected a rate hike. One of the 19 Commissioners did not submit a forecast, and markets see it as likely to be Chair Washi, who has taken a dim view of publishing rate projections.
Inflation projections were also raised sharply. The Fed lifted its forecast for the increase in the personal consumption expenditures (PCE) price index, the key gauge for policy decisions, to 3.6% from 2.7%. It also revised up the forecast for core PCE, which excludes energy and food, to 3.3% from 2.7%.
In a statement, the Fed said, "Inflation remains above the Committee's 2% goal, partly reflecting supply shocks stemming from price increases in some institutional sectors such as energy," and added, "The Committee will strive to achieve price stability."
◇ Washi starts Fed reform at first FOMC
This Federal Open Market Committee (FOMC) meeting was the first chaired by Washi since taking office on the 22nd of last month. As Washi has criticized the Fed for providing too much information to markets on rates, there were notable changes in the Fed's communication after this meeting.
First, the length of the policy statement released right after the rate decision was cut to about half, and the forward guidance language hinting at the future policy path was removed. Washi said, "We made it a little shorter and a little simpler and stripped out some old phrases," adding, "We focused on the best facts we can judge."
At the press conference, Washi also minimized comments on the economic outlook. Washi avoided specifics on the possibility or timing of rate adjustments. Regarding the practice of holding a press conference right after the meeting, Washi said, "Press conferences are useful, but there should clearly be something important to say at that time," signaling skepticism about the existing approach.
Washi also announced the launch of five task forces (TFs) to push Fed reforms. Each TF will study external communications, the Fed's balance sheet operations, sources of economic data, productivity and employment changes from the spread of artificial intelligence (AI), and the Fed's inflation target framework.