The Fed’s FOMC kept the fed funds rate (FFR) target unchanged at 5.25-5.50%, MIDF says the decision was as predicted by the market consensus as the Fed is perceived to have reached the end of its policy tightening cycle.
In a way, the Fed signaled the end of rate hikes as the FOMC predicted a quicker reduction for fed funds rate in the coming years. However, given the Fed’s focus to push inflation to lower levels, the Fed still did not rule out the possibility of more hikes. If inflation remains persistently elevated and sticky, additional rate hikes may be necessary to reduce inflation to the Fed’s target of 2%. In addition to keeping the policy rate unchanged, quantative tightening still continues as the Fed reiterated the continuation of its balance sheet reduction, which has decreased by more than USD1.2t from the peak in midMar-22.
Given inflation still remained above the Fed’s 2% target and recent data somehow suggests core CPI inflation remained sticky, MIDF expects the Fed will maintain the existing policy setting until at least 1HCY24. Moving into 2HCY23, it foresees the slower growth and weaker aggregate demand will allow the Fed to begin to ease the policy restrictiveness and begin to cut fed funds rates. This will be subject to the overall strength in the US economy, mainly consumption spending outlook.
MIDF expects the job market and wage growth will be the important data to be monitored closely to gauge the health of aggregate demand and ability of consumers to sustain their spending activities. The delayed effect monetary policy tightening also suggests the economy will experience slower growth next year as both consumers and businesses are hit by the high borrowing costs. If growth were to slow sharply, the Fed may consider larger rate cuts and adopt accommodative policy to stimulate the economy.
