19 December 2024
Federal Open Market Committee (FOMC)
- The US Federal Reserve (Fed) cut its key interest rate by 25 basis points (bps), lowering the federal target range to 4.25% – 4.50%. This marks the third consecutive rate reduction in 2024, following a similar 25 bps cut in November which was anticipated by the market. However, the Fed’s less dovish tone and reduced expectations for rate cuts in 2025 resulted in the bond market reacting unfavorably with UST 2y rose by 11bps to close at 4.36% while the UST 10y rose by 13.5bps to close at 4.52%. The dollar index (DXY) surged to a two-year high of 108.06 following the announcement, reflecting a less dovish outlook from the Fed. Correspondingly, the USDMYR exchange rate saw a depreciation of 0.10% to 4.4770 to open the market, as the stronger dollar pressured emerging market currencies like the Malaysian ringgit amidst global monetary policy adjustments.
- The new dot plot suggests a more gradual and shallower rate cut path ahead. Notably, the Dot Plot indicates that policymakers now anticipate fewer rate cuts; for 2025, the median forecast is just two cuts, a reduction from four cuts projected in September. The updated projections reflect the Fed’s cautious approach amid persistent inflationary pressures and a robust economic backdrop. While inflation remains above the 2% target, the Fed signaled that it intends to keep rates elevated for longer to ensure price stability. Additionally, Chair Powell reiterated that policymakers are still working toward a neutral stance but noted that the pace of future rate reductions will depend on incoming data and evolving economic conditions. He also highlighted that the U.S. economy remains robust, with solid growth and a labour market that has eased but remains resilient.
- The Fed highlights persistent inflation risks and resilient economy amid revised projections. The latest PCE inflation data was revised upward by the Bureau of Economic Analysis (BEA), with core PCE projected at 2.8% for 2024 (Nov’24: 2.6%), 2.5% for 2025 (Nov’24: 2.2%) and 2.2% for 2026 (Nov’24: 2.0%). The Fed has taken a more optimistic stance on economic growth, adjusting their GDP growth forecasts upward to 2.5% for 2024 (Nov’24: 2.0%) and 2.1% for 2025 (Nov’24: 2.0%). During the press conference, the Fed Chair Powell indicated that the December rate decision was a “closer call” and noted that while policy rates remain significantly restrictive, the proximity to the neutral rate necessitates a cautious approach.
Opus View
- We maintain the expectation of additional rate cuts in 2025, with the projected total reduced from 75 basis points to 50 basis points, bringing the terminal upper bound of the federal funds target rate to 4.00%. This revision accounts for the change in the dot plot by the Fed as well as the market pricing in fewer cuts. The forecast of two rate cuts in 2025 would be highly dependent on the policy developments related to trade tariffs, tax reforms, immigration, and other economic measures introduced by the Trump administration, which could significantly influence inflation and economic conditions.
- Locally, the reaction is relatively muted with government bonds only inching 1-3bps from previous closing. The local bond market is still supported by the reduction in supply and demand from local institutions.
- Looking ahead to 2025, we opine that yields remain favorable for the bond market with lesser reward in going long duration as yield curve still remains flat. Hence, we will maintain our duration between 5 – 6 years, while focusing on high quality corporate bonds for yield pick-up.
Disclaimer
The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity. Individual investors should contact their own licensed financial professional advisor to determine the most appropriate investment options. This material contains the opinions of the manager, based on assumptions or market conditions and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information provided herein may include data or opinion that has been obtained from, or is based on, sources believed to be reliable, but is not guaranteed as to the accuracy or completeness of the information. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Opus Asset Management Sdn Bhd and its employees accept no liability whatsoever with respect to the use of this material or its contents.
