US Fed did not have a 'surprise rate hike' but a 'hawkish freeze'... 3 members for a hike

US Fed did not have a 'surprise rate hike' but a 'hawkish freeze'... 3 members for a hike

Despite improvement in June inflation, price uncertainty from Middle East war remains

Wash-led Fed minimizes future policy signals... Market expects September hike

The US Federal Reserve (Fed) maintained its benchmark interest rate at an annual 3.50-3.75% on the 29th (local time), but with three members within the Fed advocating for a rate hike and opposing the freeze decision, it is interpreted as a de facto 'hawkish (favoring monetary tightening) freeze.'

Wall Street experts generally predicted that the Fed would freeze the benchmark interest rate ahead of this rate decision.

Wall Street's assessment is that the 0.4% month-over-month drop in the US Consumer Price Index (CPI) in June, thanks to a sharp fall in oil prices, gave the Fed some breathing room to wait and see how the situation develops.

Of course, with renewed military exchanges between the US and Iran this month, and threats to not only the Strait of Hormuz, a major international energy shipping route, but also the Red Sea shipping lanes, international oil prices have rebounded sharply, and inflation risks still remain.

For this reason, traders betting on the direction of interest rates saw a certain possibility of a 'surprise hike' by the Fed ahead of the rate decision on this day.

In fact, according to FedWatch by the Chicago Mercantile Exchange (CME), the interest rate futures market reflected a roughly one-third probability of the Fed raising rates at this meeting until just before the rate decision.

Although the 'surprise hike' scenario anticipated by some on Wall Street did not materialize, the fact that three Fed members voiced opinions for a rate hike in this rate decision reflected that there was indeed a strong voice within the Federal Open Market Committee (FOMC) demanding a rate hike.

At this meeting, three members – Beth Hammack (Cleveland), Neel Kashkari (Minneapolis), and Lorie Logan (Dallas) – opposed the freeze decision, advocating for a 0.25 percentage point rate hike.

These three members had previously expressed their opposition at the April FOMC meeting, stating that it was inappropriate to maintain the dovish-biased phrase 'additional adjustments' in the policy statement.

However, Hammack and the other two members did not express dissent in the June FOMC's rate freeze decision, and that rate freeze decision was passed unanimously at the time.

The Fed maintained its existing stance on the US economic situation.

Aside from the content stating that the three members, including Hammack, advocated for a rate hike, the phrasing related to the assessment of the economic situation in today's policy statement was almost unchanged compared to the June statement.

Earlier, some on Wall Street had speculated that the Fed might provide clues about the possibility of future rate hikes in this statement.

However, like the June statement, the July statement also completely removed phrases related to policy signals that mention future policy direction.

In this statement, the FOMC stated, "Inflation remains above the 2% target, partly reflecting supply shocks that have caused price increases in some sectors, including energy," and "The Committee will achieve price stability," thus maintaining the content of the June phrasing.

This is interpreted as reflecting the new Fed Chair Kevin Warsh's stated intention to minimize forward guidance on policy direction.

However, Fed members have indicated that they expect one rate hike within the year. Previously, Fed members noted in the economic projections dot plot released in June that they expected one rate hike within the year, based on the median.

The market expects a high probability that the Fed will implement a 0.25 percentage point rate hike in September.

According to FedWatch by CME, the interest rate futures market reflected approximately a 72% probability of the Fed raising rates in September immediately after the rate decision announcement today.