U.S. Monetary Policy / Next focus Will Be on Timing of When Fed Will Start Cutting Interest Rates

The U.S. Federal Reserve Board, which has recently continued to raise interest rates, is expected to change its policy in the near future. Such a move would have a significant impact on financial markets, and the Japanese government and the Bank of Japan must keep a close eye on future developments.

The U.S. central bank has left its policy rate unchanged in the 5.25%-5.50% range for a third straight time, following similar decisions in September and November.

Fed Chair Jerome Powell said at a recent press conference that the Fed believes its “policy rate is likely at or near its peak for this tightening cycle.” This suggests the possibility that a series of rate hikes that began in March 2022 aimed at curbing sharp inflation may have come to an end.

During its most recent meeting, Fed policymakers discussed the optimal timing to start rate cuts, he said.

At a press conference held last month, Powell hinted at possible additional rate hikes and said the Fed’s policy committee “is not thinking about rate cuts right now at all.”

In light of this, his remarks following the latest meeting can be described as a major change of direction in Fed policy.

Forecasts released at the same time indicated that policymakers expect to cut the benchmark rate to 4.6% by the end of 2024. Assuming the rate is pared gradually on a standard quarter-point basis, the Fed is likely to cut the rate three times next year.

The U.S. economy remains robust despite a number of rate hikes by the Fed. The effects of monetary tightening are said to emerge in six months’ time, or later.

Home sales have been sluggish due to a rise in mortgage rates. Higher interest rates burden companies when they make capital investments. Student loan repayments, which were paused during the COVID-19 pandemic, resumed in October, giving rise to concerns over consumer spending. The U.S. economy is expected to slow in the future.

Meanwhile, inflation has subsided, with the U.S. consumer price index on a year-on-year basis falling to 3.1% in November from its peak of 9.1%.

Factors such as these may be behind the expected policy shift. However, there is a risk that inflation could resurge if interest rates are cut too soon. It is hoped that the Fed will carefully weigh the timing of its rate cuts.

Markets moved sharply following Powell’s latest press conference. The Dow Jones Industrial Average hit a record high Wednesday in anticipation of the Fed’s cuts. The yen strengthened briefly to the ¥140 level against the dollar on speculation that the interest rate gap between the United States and Japan is set to narrow.

Japan’s central bank has continued its policy of monetary easing, but when BOJ Gov. Kazuo Ueda said in the Diet on Dec. 7 that the situation would become more challenging from year-end into next year, his remarks were perceived as a hint that the BOJ intended to exit its negative rate policy, which boosted the yen’s value for a short while.

Markets may continue to fluctuate in light of the BOJ’s possible policy changes. It is hoped that Japan’s central bank, too, will disseminate information carefully.

(From The Yomiuri Shimbun, Dec. 17, 2023)