13 June 2024
Federal Open Market Committee (FOMC)
- Federal Reserve kept current Fed Funds Rate (FFR) unchanged at 5.25%-5.50%, in line with market expectations that June will be a non-event. Markets were reacting more to the cooler than expected inflation print on the same day than the FOMC meeting despite looking “hawkish” on the surface. The 10-year US treasury (UST) yields dropped 14bps to 4.27%, retracing from its recent post non-farm payroll (NFP) high of 4.47%.
- Fed statement relatively unchanged. Other than some acknowledgement of the recent softer inflation data that was described with the phrase “modest further progress”, changing from “lack of further progress”, the statement repeats data-dependence and greater confidence on inflation moving towards their committed 2% objective in the long run as pre-requisite to start cutting rates, essentially giving the Fed optionality.
- Fed projects lesser rate cuts with higher inflation. The dot plot projections now only imply 1 (25bps) cut, as opposed to the 3 cuts guided before. This was in line with the stickier core-inflation that they see in 2024, being revised upwards to 2.8% from 2.6%. Meanwhile, growth forecast for all periods remained unchanged. It is worth noting that the median long-term “neutral” rate was also revised higher by 20bps to 2.85% (from 2.65%).
- Press conference emphasised close watch on labour market. We see slight dovish undertone in Fed chair Powell’s speech as he notes some cooling in the labour market and that an unexpected weakening could call for a response. Furthermore, this undertone was also seen in the phrase “not our plan to wait for things to break and then try to fix it”, hinting that the Fed is being cognisant of the risks of waiting too long.
Opus View
- Rate cuts will happen but not so soon. The revision in the median dot plot implying 1 rate cut in 2024 was already priced-in by the markets with the big adjustment of UST yields seen throughout Q1’24. In fact, markets are again pricing ahead 2 cuts in 2024, with the first likely happening in Sep’24 FOMC. Regardless of the timing and magnitude, we think that the bias towards downside in rate trajectory is growing stronger as no further fiscal stimulus is expected until after the US elections while consumers continue to erode their excess pandemic savings. Drawing inference from the last time the Fed raised the neutral rate to 3% while saying “we are far from neutral rates” back in Sep’18, it also coincided with the peak in bond yields. Given the pro-cyclical and unobservable nature of the neutral rate, the Fed tends to act in this manner at the very late stage of the interest rate cycle.
- 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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