Powell signals three interest rate cuts next year

The U.S. central bank, the Federal Reserve (Fed), has formalized a pivot (monetary policy shift), predicting an interest rate cut next year for the first time since high-intensity tightening began in March 2022. The global financial markets cheered the strong pivot signal, anticipating three interest rate cuts next year. This led to the U.S. Dow Jones Industrial Average reaching an all-time high and the KOSPI also experiencing an upward rally.

On Wednesday (local time), the Federal Reserve announced at the Federal Open Market Committee (FOMC) meeting that it would maintain the U.S. base interest rate at 5.25-5.5%. This marks the third consecutive interest rate freeze. The focal point in the market that day was the dot plot. The dot plot represents the 17 FOMC members’ interest rate forecasts expressed by 'dots.' Their median forecast for interest rates at the end of the next year was 4.6% (ranging between 4.5-4.74%), indicating a decrease of 0.75 percentage points compared to the current interest rate. This implies the possibility of three cuts of 0.25 percentage points each next year. Federal Reserve Chairman Jerome Powell conveyed optimism throughout the press conference, citing a faster-than-expected decline in U.S. prices.

“It is time for (discussions on interest rate cuts) to begin to become visible,” he remarked. “It was also a topic of discussion at today’s (FOMC) meeting.” Furthermore, he declared that the high-intensity tightening cycle had effectively concluded: "Interest rates have peaked or are close to it.” Following the formalization of the Federal Reserve's pivot, which had raised 5.25 percentage points 11 times in one year and nine months, the stock market surged vertically. The U.S. Dow rose 1.4%, surpassing the 37,000 mark for the first time in history. Among large-cap stocks, the Standard & Poor's (S&P) 500 and Nasdaq both reached their highest levels since January of the previous year. On Thursday, KOSPI closed at 2,544.18, marking a 1.34% increase from the previous day. The won-dollar exchange rate also closed at 1,295.4 won, down by 24.5 won.


Hyoun-Soo Kim kimhs@donga.com