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27 Jan 2023

International Economy

First FOMC meeting of 2023, January 31 – February 1. Fed may slow its policy rate hike by 0.25% amid easing inflation. However, future US policy rate will chiefly hinge on inflation and other economic data (Business Brief No.3991)


        At the upcoming Federal Open Market Committee (FOMC) of the year, January 31 – February 1, 2023, KResearch expects that the US Federal Reserve (Fed) will slow its policy rate hike by 0.25 percent to 4.50-4.75 percent as inflation has steadily declined. Headline inflation in the US fell for the sixth consecutive month in December 2022 to 6.5 percent, the lowest since October 2021, though it remained relatively high. Meanwhile, the US labor market is still robust, meaning that the Fed may continue to hike its policy rate, going forward. However, it may consider raising its policy rate at a slower pace by 0.25 percent at the upcoming FOMC meeting amid signs of easing inflation.
        Looking ahead, the Fed's policy rate will hinge on inflation and other economic data. KResearch is of the view that the US economy in 2023, especially during 1H23, will feel the pinch of the Fed's continuing policy rate hikes from the previous years, and the overall U.S. economy may record static growth (GDP growth at 0 percent), prompting the Fed to put more weight on the economic risk, going forward. Meanwhile, although the US inflation rate remains well above the Fed’s target of 2.0 percent, it is expected to gradually decline this year as commodity prices will likely be pressured by an anticipated global economic slowdown. Even though a better outlook towards the Chinese economy may have caused commodity prices to increase somewhat, they are not expected to surge as seen in 2022 when Russia invaded Ukraine in a major escalation of the Russia-Ukraine war. Under such scenario, we at KResearch view that the Fed may raise its policy rate only once more at its March 2023 meeting, bringing the Fed Funds rate to a record high of around 5 percent. The Fed may maintain its policy interest at that level throughout 2023. However, if U.S. inflation rate remains high and does not decline as much as it should while the US labor market powers ahead, the Fed may need to raise its policy rate above 5.0 percent.

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International Economy