Powell’s Hawkish Pivot: Rate Cut Hopes Dashed

● Fed’s Rate Cut Retreat

2024 Fed Monetary Policy Paradigm Shift: Powell’s Remarks and Future Outlook Summary

This article covers several key issues you need to know.
It includes the structural direction of the changing Fed (U.S. central bank) monetary policy, the limitations of the post-2020 framework, the internal logic of the Fed dismantling the Average Inflation Targeting (AIT) regime, and the very important outlook for the hawkish (tightening) policy shift after 2025 and its impact on the global economy and financial markets.
In particular, it structurally shows the chronological flow of interest rates, inflation, and changes in the Fed's framework.
We also provide insights into how to interpret recently released major economic indicators such as CPI, PPI, and PCE.

1. Fed Monetary Policy Framework: Changes Before and After 2020

2015~2019: Concerns About Deflation and the Era of Low Interest Rates
Long-term zero interest rate policy after the global financial crisis.
Growing concerns about deflation (falling prices), especially in developed countries.
The U.S. benchmark interest rate also slowly rose to 2.4%, but was lowered back to 1.6% at the end of 2019.
Japan/Europe entered negative interest rates.
The Fed is increasingly concerned about repeating a helpless state with 'almost no cards' as shown below.
- Characterized by low growth, low interest rates, low inflation, and a gentle Phillips curve.
2020: Introduction of Average Inflation Targeting (AIT)
Politically, a temporary overshoot of 2% inflation is allowed.
The logic is that if prices are below 2% for a long time, temporarily exceeding it should be tolerated to match the long-term average of 2%.
As a result, interest rate hikes are delayed, and the market is signaled to 'allow inflation.'
-> Increases inflation expectations and long-term interest rates.

2. Post-COVID Environment and the Fed’s Misjudgment

2020~2021: Unprecedented Liquidity Supply, Explosive Rise in Real Inflation
The Fed supplied massive market liquidity in response to the pandemic.
Inflation began to soar, and the Fed delayed tightening, judging that 'inflation is temporary.'
Eventually, the logic of the average inflation targeting regime proved unable to properly reflect reality.
As a result, 'real' inflation, such as the U.S. CPI, PPI, and PCE, continued to exceed the Fed's expectations.

3. 2025 Framework Redesign and Powell’s Signals

New Monetary Policy Direction
Powell said, "The economic environment after 2020 has completely changed."
In an era of structural inflation, long-term real interest rates are also rising.
Supply chain shocks continue, increasing price volatility.
The U.S. economy is no longer centered on deflationary downward energy.
Paradigm Shift in Dealing with Inflation
Pursuing a more decisive 'real 2% inflation target' than 'average 2%.'
In the past, the Fed tried to passively raise inflation,
Now, it is expected to shift the policy framework to actively lowering (suppressing) inflation.
Possibility of Strengthening Hawkish (Tightening) Stance in the Future
The Fed is more likely to pull out the interest rate hike card more quickly and decisively in response to inflation exceeding 2%.
Despite pressure from the political world, including Trump, the independence of the central bank and the consistency of financial policy are emphasized.

4. Current Economic Indicator Situation and Market Interpretation

Recently Released CPI, PPI, PCE
Superficially low, but in fact, inflation is already above 2%.
In the past framework, 'allowing a slight overshoot' was accepted,
In the future, it is highly likely that this will no longer be tolerated.
Market and Policy Influence
Powell and the Fed are expected to begin reflecting changes in the new framework after September.
Expectations for interest rate cuts at the end of the year ~ early 2025 may weaken.
The possibility of increased volatility in the global financial market.

5. Future Investment and Global Economic Impact

Expected Policy Changes and Investor Action Strategies
The Fed's paradigm shift will affect the U.S. and global interest rate environment, stocks, bonds, and dollar exchange rates.
Strengthening inflation management → possibility of emerging market capital outflow/dollar appreciation.
If expected inflation occurs, there will be an overall impact on global stock markets, real estate, and commodities.
Need to Adjust Expectations for Interest Rate Cuts
Investors and businesses should be wary of 'loose interest rate cut expectations' after the second half of the year.
For the 2025 interest rate outlook, it is necessary to prepare several scenarios according to changes in the Fed's framework.

6. Conclusion and Request

The Fed's monetary policy paradigm is changing 180 degrees from the deflation to the inflation era.
The Fed is likely to end its previous relaxed tolerance of inflation and respond much more sensitively to suppressing prices.
This change can have a significant impact on the global economy, capital markets, and investment paradigms.
It is essential to monitor recent Fed remarks, major economic indicators, and changes in the macroeconomic environment.

– The Fed’s monetary policy framework is expected to be significantly redesigned in 2025, along with recent remarks by Chairman Powell.
– The era of Average Inflation Targeting (allowing over 2%) is virtually over.
– The Fed is likely to deal with inflation exceeding 2% more immediately and decisively in the future, which will directly affect not only the U.S. but also the global financial market.
– Both investors and businesses must check what impact the Fed’s change in perspective will have on the market and asset prices.
– It is necessary to pay attention to signals such as interest rate outlook, inflation, and dollar appreciation in the second half of the year ~ 2025.

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