18 June 2025
Federal Open Market Committee (FOMC)
- The US Federal Reserve (Fed) kept its key interest rate steady in the range of 4.25% – 4.50%, as widely expected. The Fed maintained a cautious tone, citing economic uncertainties have diminished from the peak in April but remain elevated. Market movements were relatively muted, with UST 2y closed 1 bps lower at 3.94% while UST 10y held steady at 4.39%. Meanwhile, the dollar index (DXY) closed marginally higher by 0.1% to 98.91. Correspondingly, the USDMYR exchange rate closed higher by 0.2% to 4.252, tracking regional currencies movement.
- The updated dot plot maintained expectations for two rate cuts ahead with an average 50 bps cut for 2025. The projections, however, showed a wider expectation spread with seven officials now see no rate cuts this year compared with four in March. The revised dot plot also reflects the anticipation of higher inflationary pressures, mainly stemming from tariffs, which officials are anticipating these effects to become evident in the upcoming months. While inflation remains above the 2% target, the Fed reaffirmed its dual mandate to balance price stability and maximum employment, aiming for a neutral monetary policy stance in the near term. Additionally, future monetary policy decisions will hinge on incoming data and evolving economic conditions as downside risks persist.
- The Fed sees elevated inflation, higher unemployment and lower growth this year. The PCE inflation data was revised upward, with core PCE projected at 3.1% for 2025 (Mar’25: 2.8%). The Fed also anticipates unemployment to rise 4.5% in 2025 (Mar’25: 4.4%) while the GDP growth is projected to grow at a slower pace of 1.4% in 2025 (Mar’25: 1.7%). The projections explain the reason behind the expectations of two rate cuts, as the slower growth is expected to offset some of the tariff inflations. Nevertheless, Fed Chair Powell does not see any weakening signs in the US economy in the near term, citing the continued strength of the labor market.
Opus View
- We maintain our view for additional rate cuts as early as September in the US, with the view of up to 50 basis points total rate cut this year. This would bring the terminal upper bound of the federal funds target rate to 4.00%. This revision accounts for the revised economic projections by the Fed as well as the dovish market expectations. We also opine that the potential two reductions of interest rate in H2 2025 would be highly dependent on the ongoing trade negotiations, geopolitical conflicts, tax reform as well as other economic measures introduced by US President Trump, which could significantly influence inflation and economic conditions.
- On the domestic front, yield movements were relatively muted with the government bonds held steady at 3.59%. Overall, the local bond market remains supported by strong foreign inflows and stable trading volume on the back of macroeconomic resilience.
Disclaimer
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