US Fed rates unchanged, but analysts still expect cuts in 2H
The US Federal Reserve’s (US Fed) Federal Open Market Committee (FOMC) has decided to maintain the Fed funds rate (FFR) unchanged at 5.25 to 5.5 per cent during its March policy meeting.
This is the fourth consecutive meeting where the FFR rate has been maintained and was within market expectations as the Fed had previously signalled that it is taking a cautious approach and will be waiting for more convincing evidence that US inflation is moving sustainably lower before implementing rate cuts.
Nevertheless, the Fed is still maintaining their forecast of three potential rate cuts in 2024 with the median slashed to 4.6 per cent this year, 3.9 per cent in 2025 and 3.1 per cent in 2026.
According to the research arms of Kenanga Investment Bank Bhd (Kenanga Research) and Midf Amanah Investment Bank Bhd (Midf Research), it is likely that these forecasted rate cuts will only materialise in the second half of the year (2H24).
“As the underlying core inflation remains on the moderating trend, we foresee the Fed will likely cut its policy interest rate in the latter half of 2023,” Midf Research explained.
They added that they’re also not expecting for rate cuts to materialise soon as there is still uncertainty that inflation will remain elevated for a prolonged period possibly due to persistently strong demand and wage pressures, which could cause further delay in the Fed’s decision to cut interest rates.
Taking a more optimistic stance, Kenanga Research are persisting in factoring in the possibility of the Fed initiating its first rate cut in June as well as a possibility of four rate cuts rather than the US Fed’s forecast of three.
“Our expectation is fuelled by an anticipated disinflation rate of approximately 0.15 to 0.20 per cent month on month (m-om) in the coming data releases, which we view as prerequisite for the Fed to consider reducing rates,” they said.
In its March FOMC statement, the US Fed guided that it does not expect that “it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably towards 2.0 per cent.
With the possibility of the US Fed initiating a hard landing further diminishing at this point and a general consensus that they will pivot to rate cuts in 2H24, Kenanga Research adds that Bank Negara Malaysia (BNM) is likely to keep its policy rate unchanged at 3.00 per cent for the remainder of 2024 at least.
Elsewhere, Bank Indonesia (BI) who have also recently completed its March Board of Governor meeting had announced that they would be leaving their current rates unchanged at 5.25 per cent for its Deposit Facility and 6.75 per cent for its Lending Facility.
Though inflation rate in Indonesia remains under control at the range of 1.5 to 3.5 per cent, the BI reiterated that they are currently maintaining its status quo for an extended period to support the fragile rupiah and the rising risk of a slower economic growth.
Kenanga Research is expecting BI to also pivot in 2H24 with three rate hikes and settling the year-end BI rate at 5.25 per cent.