■ The FOMC decided to reduce the rate to 0.50% and at the same time revised participants' policy rate forecasts upwards.
■ Policy of continued monetary tightening despite economic slowdown, but divergent views on future policy shifts
At its meeting on 13 and 14 December, the US Federal Open Market Committee (FOMC) decided to raise the policy rate by 0.50%, reducing the rate increase from 0.75%, which had been in place for the last four meetings. The statement largely followed that of the previous meeting. As before, it stated that "the Committee recognises that a continued increase in the policy target (interest rate) range is appropriate to achieve a sufficiently tight monetary policy stance to return to 2% inflation in the longer term", without providing any specific clues as to when the rate hike would end or any future policy shift.
In the quarterly Summary of Economic Prospects (SEP) (all forecasts below refer to the median of participants), participants' policy rate forecasts were raised from September to 5.125% at end-2023, 4.125% at end-2024 and 3.125% at end-2025, respectively, and at least The policy of maintaining a higher policy rate level than the current one until the end of 2023 was confirmed, above the long-term forecast of 2.500% until 2025, which also indicates the intention to continue the tightening policy for a longer period. At the same time, real GDP growth has been revised downwards until 2024, while unemployment and inflation forecasts have been revised upwards until 2025, with the economy expected to be strongly constrained by the continuation of tightening policy.
From the above, it can be read that the US Federal Reserve has clearly ruled out an early shift in its tightening policy stance, even in the face of continued economic weakness. Like the statement and the SEP, Fed Chair Powell's press conference also emphasised the need to continue tightening monetary policy.
The Fed has long indicated its willingness to tolerate a slight slowdown in the economy and to maintain higher interest rates for as long as possible in order to contain the rise in inflation expectations over the longer term. However, from 2024 onwards, the divergence in the policy rate outlook widened, indicating divergent views on a future shift in policy. The financial markets are also factoring in a sharp slowdown in the economy due to continued monetary tightening, and there is a divergence between the Fed's views and the financial markets' perceptions. With no clear guidance on future policy, the Fed's communication is likely to amplify market volatility further in 2023, as policy shifts are on the horizon.