United States: Revising the Policy Rate Outlook

■ After reflecting the "mutual tariffs" in the Summary of Economic Projections (SEP), the economy is not expected to fall sharply but to remain sluggish for a prolonged period.  

■ While the Federal Reserve (FRB) expects a moderate rate cut, the neutral interest rate level may be reached sooner due to a slow response and adjustments in the labor market. 
 
    At the Federal Open Market Committee (FOMC) meeting held on June 17-18, 2024, the “Summary of Economic Projections (SEP)” was updated, and the latest economic outlook from FOMC members was announced. Compared with March, before the details of the “mutual tariffs” were revealed, the median forecasts show a downward revision of the real GDP growth rate for 2025 and 2026, and increases in the inflation rate and unemployment rate from 2025 to 2027. The real GDP growth rate is expected to be below the long-term potential growth rate, and the unemployment rate above the natural rate, continuing until 2027. This also indicates that inflation will remain above the target level. Expectations for the policy rate in 2026 and 2027 have been raised, supporting a gradual and moderate rate-cutting approach. 
 
    In April 2024, the Bank increased its concern that the United States might face a sharp economic slowdown due to the implementation of the "mutual tariffs" and revised its policy rate forecast, predicting a faster rate cut to the neutral level of 3.00% than previously projected in the March SEP. This forecast is based on the view that, despite cautious initial measures, the Federal Reserve will respond to labor market adjustments once signs of economic slowdown become clear, provided medium- and long-term inflation expectations stay stable. Since the tariff measures between countries have been postponed to July 9 and U.S.-China tariff rates have fallen back to pre-April levels, the likelihood of a sharp slowdown has decreased compared to earlier projections, although the risk of a prolonged economic decline persists due to ongoing trade negotiation challenges. The June SEP does not anticipate a sharp slowdown but expects a long-term downturn. Due to inflationary pressures from tariffs, the Federal Reserve remains vigilant. The consensus is that rate cuts will proceed slowly until 2027, reflecting a cautious stance compared to earlier expectations of aggressive rate reductions. 
 
    The Bank has adjusted its policy rate forecast according to the SEP, considering the impact of the "mutual tariffs" and the Fed's cautious approach. The forecast suggests a reduced likelihood of large early-stage rate cuts. According to the new plan, the rate will be lowered by 0.25% at each meeting starting in September 2024, reaching the neutral rate of 3.00% by April 2026. Although the timing and pace of rate cuts remain unchanged, the initial cut will be smaller—0.25% instead of 0.50%—delaying the achievement of the neutral rate by one meeting cycle. Given the possibility that the Fed may lag behind the economic situation due to its cautious stance, and considering next year's changes in FOMC voting rights, the Bank still anticipates a more aggressive rate-cutting path than the SEP suggests. Fundamentally, it is expected that future labor market adjustments will accelerate, further supporting rate cuts.