21 March 2024
Federal Open Market Committee (FOMC)
- The US Federal Reserve (FED) paused for the fifth consecutive time, maintaining current Fed Funds Rate (FFR) at 5.25%-5.50%, largely in-line with market expectations. The Fed continues to signal multiple cuts before the end of the year.
- The March monetary policy statement closely resembled the one from January, maintaining its stance that the FOMC “does not anticipate reducing the target range until it is more confident that inflation is steadily progressing towards 2 percent.” However, there was a slight alteration in the discussion of the labour market. In the March statement, it was succinctly mentioned that “job gains have remained strong,” whereas the January statement was somewhat less optimistic, where the fed noted that “job gains have moderated since early last year but remained strong”, implying that the Fed remains cautious over the impact of the tight labour market to inflation.
- Fed’s forecast and rate trajectory continues to imply the possibility of 3 rate cuts in 2024. The latest dot plot maintained its projections for 2024, consistent with those from December, indicating officials anticipate a reduction of the FFR by 75 basis points until the end of the year. However, there was a shift in the median participant’s expectations for rates in the following years, with the forecast for 2025 now at 3.9% (previously 3.6%) and for 2026 at 3.1% (previously 2.9%), hinting higher longer term neutral rates for the US. For 2024, the Core Personal Consumption Expenditures (CPE) inflation forecast was shifted higher to 2.6%, compared to Dec’23 forecast of 2.4%, while GDP is expected to grow by 2%, compared to the Dec’23 projection of 1.8%.
Opus View
- Rates to stay higher for longer. We expect rates to stay higher for longer with 50 – 100 bps rate cuts in 2H2024. With the better growth expectation and higher inflation numbers, we see a higher risk of lower rate cuts. As such, we see further risk of correction as the market is now pricing 75 bps rate cuts.
- 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 local bond market and the MYR as the yield differentials will narrow.
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