The U.S. Federal Reserve's rate cut expectations have eased... The likelihood of an extended tightening stance has increased.

Market expectations surrounding U.S. monetary policy are changing rapidly, and the view that the Federal Reserve will not cut its benchmark interest rate this year has solidified into the market’s mainstream scenario. As upward pressure on prices has intensified again, along with uncertainty over an upcoming leadership change at the Federal Reserve, expectations for rate cuts have retreated. Instead, explanations that the tightening stance may last longer than previously expected are gaining traction.

According to a report from the Bank of Korea’s New York Office on the 14th, as of the 8th, U.S. financial markets have priced in zero rate cuts for the remainder of the year. The number of rate cuts expected for the year, as reflected in market pricing, fell from 0.9 in mid-March to 0.3 on the 10th of last month; this month it has fallen all the way to 0. Accordingly, the futures market’s December policy-rate expectation is 3.65%, higher than last month’s 3.57%, and it is also expected that the year-end rate will be above the 3.62% forecast for June. This means the market has begun to consider that, after the second half of this year, interest rates are more likely to stay unchanged or rise further rather than decline.

Global investment banks’ views are shifting in a similar direction. Among the 10 investment banks surveyed by the Bank of Korea, 5 believe the Fed will not cut rates this year. Morgan Stanley, Barclays, and Bank of America had previously expected the Fed to restart rate cuts in September this year, but in this month’s view they all pushed that timing back to next year. Morgan Stanley expects a rate cut in January next year, Barclays in March, and Bank of America in July. Barclays also reduced its expected number of rate cuts from 2 to 1. Going further, JPMorgan Chase predicts that there could be one rate hike between this year and next, with the final rate reaching 4.00%. Deutsche Bank, meanwhile, lowered its rate-cut expectation from 1 time to 0 times—effectively concluding that the rate-cut phase is over.

Behind this shift in sentiment is a renewed rise in concern about U.S. inflation. The oil-price shock triggered by the Middle East has increased the burden on energy prices, and as a result, the U.S. Consumer Price Index in April posted the largest increase in more than three years. Because it is difficult for central banks to cut rates easily when prices are unstable, the market currently leans toward the view that the Fed will remain on the sidelines temporarily. In addition, current Chair Jerome Powell’s term ends on the 15th, and the U.S. Senate is about to begin the confirmation process for the nominee for the next Fed chair, Kevin Wachs. This is also viewed as a variable. During the transition period between policy decision-makers, the policy direction is hard to determine, so markets tend to respond more cautiously.

The trend of weakening U.S. rate-cut expectations is also affecting South Korea’s outlook for monetary policy. Citibank predicts that the Bank of Korea will raise rates a total of four times until April next year, with the final rate reaching an annualized 3.5%. Previously, the bank only expected two rate hikes in July and October this year, but it has now shifted its outlook to a more hawkish stance—i.e., the view that higher rates are preferable to stabilize prices. Morgan Stanley also, in its “South Korea Economic Outlook 2026” report released on the 12th, forecasts that the Bank of Korea will raise rates three times starting from the fourth quarter of this year, with the final rate reaching 3.25% in the first half of next year. At the same time, the bank raised its forecast for South Korea’s economic growth this year from 1.8% to 2.8%. Its rationale is that the momentum of economic growth is exceeding potential levels and that price pressures are building. This trend could become even more pronounced depending on future U.S. price developments, international oil prices, and the policy inclination of the new Fed chair. South Korea is also likely to adjust its monetary policy path by taking into account both the external interest-rate environment and domestic price trends.