31 July 2025
Federal Open Market Committee (FOMC)
SUMMARY
➤ The US Federal Reserve (Fed) maintained its key interest rate steady in the range of 4.25% – 4.50, citing interest rates are in place to manage tariff and inflation uncertainties. The Fed also turned less optimistic on the US economy and sees uncertainty remain elevated.
➤ We view monetary easing cycle in the US start as early as September, though the market sees less probability for rate cut (43%) based on the market implied Fed funds futures. The UST yield curve will remain elevated on persistent uncertainties while the dollar for the 2H2025 will remain volatile.
➤ The local bond market in the near term is expected to hinge on the outcome of Malaysia’s trade negotiations with the US, tariff-led impacts, and foreign holdings of Malaysian bonds. We also foresee a possibility of up to 25 bps interest rate cut in Q4’25.
- The US Federal Reserve (Fed) maintained its key interest rate steady in the range of 4.25% – 4.50%, citing interest rates are in place to manage tariff and inflation uncertainties. The decision came after a 9-2 vote to stay on hold with Christopher Waller and Michelle Bowman, both Trump appointees dissented. The UST yield curve moved upward, with UST 2Y rose 7 bps to 3.94% while the UST 10Y rose 5 bps to 4.37%. Meanwhile, the dollar index (DXY) closed marginally higher by 0.1% to 99.82. Correspondingly, the USDMYR exchange rate closed higher by 0.2% to 4.2523, tracking regional currencies movement.
- The Federal Reserve turned less optimistic on the US economy and sees uncertainty remain elevated. Officials updated their assessment of the US economy, citing “recent indicators suggest growth moderated in the first half of the year,” and revising prior “solid” growth. The observation in prior statement that uncertainty over the economic outlook had diminished was dropped by reiterating that uncertainty “remains elevated.” As for inflation level, the Fed still views as “above target”. Despite the assessment of labor market continues to be described as “solid”, job creation has seen some cracks with June jobs report adding 147,000 jobs in the month compared to an average of 168,000 jobs in 2024.
- On data front, the US economy showed signs of resilience as the effects of the tariff have not yet been fully realized. Advanced GDP growth rebounded in Q2’25, expanding to 3.0% YoY (Q1’25: -0.5%), driven by significant front-loading activities. Imports significantly declined 30.3% (Q1’25: 37.9%), while exports fell moderately by 1.8% YoY (Q1’25: 4%). Personal consumption expenditure (PCE) price index, the preferred inflationary gauge, showed a modest increase of 2.1% YoY during the quarter (Q1’25: 3.7%), slightly above the Fed’s 2% target. Core PCE inflation increased 2.5% YoY (Q1’25: 3.5%). Consumer spending gained pace at 1.4% during the period (Q1’25: 0.5%), driven by services and goods but well-below the 2.8% growth in spending in 2024.
- According to the International Monetary Fund, the latest projection for US economic growth has slightly revised upward to 1.9% (Apr’25: 1.8%). Inflation in the United States is anticipated to remain above target levels, with the cost-pass through effect to realize in 2H2025. Nevertheless, global GDP growth to 3.0% (Apr’25: 2.8%) for the year 2025, reflects the front-loading ahead of tariffs, lower effective tariff rates, better financial conditions, and fiscal expansion in some major jurisdictions.
Opus View
- We view monetary easing cycle in the US start as early as September, though the market sees less probability for rate cut (43%) based on the market implied Fed funds futures. Total rate cut for this year may go up to 50bps, bringing the terminal upper bound of the federal funds target rate to 4.00%. On the bond market, we opine that the UST yield curve will remain elevated on persistent uncertainties related to its economic momentum, tariff developments as well as the Federal Reserve independence. The dollar for the 2H2025 will remain volatile as we see investors rebalancing their portfolio as they digest the market headlines.
- On the domestic front, the local bond market in the near term is expected to hinge on the outcome of Malaysia’s trade negotiations with the US, tariff-led impacts, and foreign holdings of Malaysian bonds. We also foresee a possibility of up to 25 bps interest rate cut in Q4’25 if GDP growth declines to below 4% YoY, which could marginally move the yield curve lower as investors are pricing in for a possibility of rate cut amid ongoing external challenge.
Disclaimer
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