Hyundai Research Forecasts Federal Reserve to Raise Rates Once More in 2024, Target 4.17% by Next Year’s Start

The U.S. Federal Reserve’s tightening stance appears poised to persist, with emerging forecasts indicating continued interest rate hikes into next year. The Hyundai Research Institute projects the U.S. benchmark rate to reach 4.17% by the first quarter of 2025, urging South Korea to proactively address potential impacts on its foreign exchange markets, financial systems, and real economy.

A report titled “Preemptive Preparation Needed for U.S.-Originated Tightening Shock – Review of U.S. Monetary Policy and Implications,” released on the 12th, revealed the institute’s optimal U.S. benchmark rate estimate was 3.82% in Q2 2024, already above the current policy rate ceiling of 3.75%. Projections show incremental increases to 3.97% in Q3, 4.09% in Q4, and 4.17% by early 2025, with gradual stabilization expected once inflation moderates. Lee Taek-geun, a research fellow at the institute, analyzed that the Federal Reserve is likely to implement a single rate hike initially, with further adjustments contingent on evolving economic indicators.

The Fed’s policy pivot reflects renewed inflationary pressures triggered by the Middle East conflict. U.S. consumer price inflation reaccelerated to 4.2% by May, following the conflict’s onset in March. Persistent inflation has intensified the necessity for sustained tight monetary measures.

This shift was evident during the June 13 Federal Open Market Committee (FOMC) meeting. While keeping the benchmark rate steady at 3.50–3.75% for the fourth consecutive session, the Fed omitted the “easing bias” clause and revised its dot plot projections upward, signaling readiness to potentially raise rates. Among 18 participants, nine now anticipate at least one hike in 2024, with the median year-end rate projection increasing from 3.4% to 3.8%. Market expectations mirror this, with a 77.8% probability of a rate hike by December, per the CME FedWatch Tool.

Inflation’s persistence, particularly in energy and goods sectors, underpins the Fed’s tightening bias. The central bank revised its core PCE inflation forecast to 3.3% and headline PCE to 3.6% for 2024, pushing the inflation-target timeline beyond 2028. The semi-annual policy report highlighted the Middle East conflict’s disruption of Hormuz shipping routes, driving crude oil surges that ripple through gasoline and industrial energy costs. Additionally, AI infrastructure expansion has amplified demand for semiconductors and electricity, structurally elevating prices for tech components and raw materials, though long-term productivity gains may ease pressures.

Robust economic resilience and near-historic low unemployment (4.2% in June) further justify the Fed’s stance. First-quarter GDP growth reached a solid 2.1% annualized, with limited recession risks allowing sustained high interest rates to prioritize price stability.

Research Fellow Lee noted that energy shocks from the conflict could propagate to service inflation, while AI-driven cost increases might reignite inflationary cycles. Market attention centers on Fed Chair Kevin Warsh’s upcoming congressional testimony (June 14–15), which will clarify the potential for further rate hikes, Hormuz-related energy inflation responses, and AI sector overheating assessments. These views, alongside the July CPI release, will shape Treasury yields, the dollar, and tech equities.

The report warns of amplified currency and financial market volatility if additional Fed tightening occurs, potentially raising costs for South Korean households and businesses. If risk appetite wanes, South Korea’s recently surging stock market may experience heightened turbulence. Lee emphasized that U.S. tightening will extend beyond financial markets, necessitating preemptive measures to safeguard vulnerable borrowers and curb domestic demand vulnerabilities.

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