31 January 2024
Federal Open Market Committee (FOMC)
- Federal Reserve kept current Fed Funds Rate (FFR) unchanged at 5.25%-5.50%. Although this was largely consistent with market consensus expecting that January was a non-event, the overall tone from the FOMC signalled a push back against the market’s over-reaction following the Fed’s dovish pivot in the Dec’23 FOMC meeting.
- Fed statement confirmed peak in rates but remained uncertain on rate cut timing. The phrase “seeks to achieve maximum employment” was added in the statement, confirming the Fed’s focus towards creating a soft landing. Further rate hikes were also formally ruled out with the previous phrase “extent of any additional policy firming” being replaced with “any adjustments to the target range for the fed funds rate”. However, the notable push back on early rate cut expectations was seen in the Fed reverting to being “data-dependent” and emphasising the need to gain “greater confidence” of inflation sustainably moving towards the 2.00% target for any rate cut to be appropriate.
- Press conference pushed back against early rate cut expectations. Fed chair Powell explicitly dismissed the likelihood of rate cut starting in Mar’24 FOMC meeting that was widely expected by the markets previously but remained ambiguous about the specific data needed for “greater confidence”. Other than noting the “good” inflation data for the past 6 months, uncertainty was cast over its continuation.
Opus View
- Rate cuts will happen but not so soon. The latest guidance in this FOMC meeting confirmed our earlier view that market expectations of rate cut in Mar’24 was overly aggressive. Unless there is a black-swan event that threatens a wider systemic risk to the overall economy, we opined the Fed will stay cautious in starting the easing cycle in light of the resilient economic growth momentum, thus making 2H’24 the likely timing for any rate cuts to start.
- Narrative of rate cuts supportive of bond market. While the timing and the quantum of rate cuts in 2024 is still debatable and data dependent, the narrative of rate cuts commencing is supportive of the bond market. The local Malaysian Government Securities (MGS) market will also benefit from this narrative even though we expect the Overnight Policy Rate (OPR) set by Bank Negara Malaysia (BNM) to remain at 3.00% in 2024.
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