2 Feb 2024
The FOMC held rates steady for a fourth straight meeting, as
widely expected, showing that it is in no rush to reduce rates
The Fed chair also talked down the prospects of a March cut;
our economists still expect the first Fed cut in June
In its first meeting of 2024, the Federal Open Market Committee (FOMC) unanimously voted to keep the federal funds target range at 5.25-5.50% unchanged for a fourth straight meeting, as widely expected. The January FOMC meeting contained some changes in guidance in the accompanying statement, which were then echoed in the Federal Reserve (Fed) Chair Jerome Powell’s press conference. The US economy was described as “expanding at a solid pace”, rather than slowing “from its strong pace in the third quarter.” Importantly, the statement said the Fed does not expect to cut rates “until it has gained greater confidence that inflation is moving sustainably toward 2%.” This was a challenge to the market’s view that the March FOMC is a finely balanced outcome and the USD duly bounced back from some pre-meeting weakness.
Much of Fed Chair Powell’s press confidence was devoted to the question about what it would take for policymakers to attain greater confidence on the outlook for inflation. Powell explained that the last six months of inflation data had been favourable but that some policymakers remained uncertain about whether these data were sending “a true signal” about the inflation outlook. The next release of Personal Consumption Expenditures Price Index, commonly known as PCE inflation data, is scheduled for 29 February, and this will be preceded by consumer price index (CPI) data on 13 February and producer price index (PPI) data on 16 February.
More importantly, Powell said that “I don’t think it is likely that the Committee will reach a level of confidence by the time of the March meeting” that it will be time to cut rates. The US Dollar Index (DXY) rallied to 103.7 overnight on the back of that key observation, before paring some gains this morning (Bloomberg, 1 February 2024 8:30 am HKT).
The rate markets currently expect a 37% chance of a 25bp rate cut in March, with a May cut fully priced in (Bloomberg, 1 February 2024 8:30 am HKT). Our economists continue to expect the first Fed cut in June, with 75bp of cumulative rate reduction in 2024, followed by an additional 75bp of rate cuts in 2025. The federal funds target range is expected to be 3.75-4.00% by the end of 2025.
Our medium-term expectation remains one of modest USD strength, notably against the EUR and GBP. This is based on the US economy’s continued outperformance against many of the other G10 economies, and US bond yields remaining higher than those in most other G10 economies. In addition, we do not expect the collective easing among G10 central banks to match dovish market expectations. A less aggressive easing path could see risk appetite falter, supporting the USD. Finally, should other G10 central banks pivot, their currencies are likely to face downward pressure.
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