19 September 2024
Federal Open Market Committee (FOMC)
- The Federal Reserve (Fed) cut the Fed Funds Rate (FFR) by 50 basis points to a range of4.75%-5.00%, somewhat in line with market expectations that had priced in a 60% chance leading up to the meeting. However, the US Treasury (UST) experienced some “selling on the news” price action as market participants took profits, which consequently led the UST 10-year yield to rise to 3.72%.
- The Fed’s statement shifted its focus from inflation to a slowing jobs market. Phrases like“inflation has made further progress” and “gained greater confidence that inflation is moving sustainably towards 2%” indicate a greater comfort level from the Fed in achievingtheir “stable prices” mandate. However, their acknowledgment that “job gains have slowed” reflects concerns that justify a pre-emptive large move towards a less restrictive policy rate.
- The Fed projects more cuts in response to a softer job market. The dot plot projections now imply two 25-basis-point cuts in 2024, up from one cut guided in June. A further full 1% cut is implied for 2025. This aligns with the Fed’s revised view of a higher unemployment rate in 2024, now projected at 4.4%, up from 4.0% in June. Meanwhile, the core personal consumption expenditure (PCE) rate in 2024 is projected to be softer at 2.6% (down from 2.8% in June).
- The press conference justified the magnitude of this cut but kept the future pace ambiguous. While stating that “upside risks to inflation have diminished and downside risks to the labour market have risen” (in reference to downward revisions in payroll data), Fed Chair Powell downplayed the 50-basis-point cut in future meetings, saying, “No one should look at today and think this is the new pace,” and “If the economy remains solid, we can dial back the pace of cuts; equally, if the labour market deteriorates, we can respond.”
Opus View
- More rate cuts are expected. We believe that the initial 50-basis-point cut was a preemptive response by the Fed, partly motivated by leading signs of softening economic sentiment, as indicated by anecdotal surveys in their recent Beige Book. The Fed’s base case is to bring FFR rates back down to neutral, projected at 2.9% (longer-run rates), ensuring a soft-landing scenario. While the trajectory appears somewhat clear, volatility may still persist if there is a significant weakening in the labour market, prompting aggressive market re-pricing of faster cuts or lower neutral rates. The policy implications from the US election outcome on the US fiscal deficit will be closely monitored.
- The easing cycle is supportive of our bond market. As the US joins other developed economies in their easing cycle, this provides more room for emerging market central banks to ease without severely depreciating their currencies. While we still expect the Overnight Policy Rate (OPR) set by Bank Negara Malaysia (BNM) to remain at 3.00% in 2024, the potential for a downside adjustment in OPR next year and the narrowing yield differential with the US will bode well for our local bond market.
Disclaimer
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