The Fed’s FOMC decided to keep the fed funds rate (FFR) target unchanged at 5.25-5.50% at the Jan-24 policy meeting. Local investment house, MIDF said the decision was not a surprise as the market consensus predicted no change to the FFR. On another note, the Fed remained committed to reducing its holdings of financial securities as part of its quantitative tightening; with a total reduction of approximately USD1.34t from the Fed’s balance sheet between the peak at mid-Apr-22 and end-Jan-24. In other words, policy tightening is still ongoing as inflation in the US remained above the Fed’s long-term price stability target.
Following the Fed’s indication that the rate cuts may be appropriately reduced later if inflation continues to trend lower, MIDF says it expects the Fed to likely cut interest rates in the latter half of 2024. At the moment, the Fed will be holding the high interest rates for a longer period because the Fed will need to balance between moderating inflation lower vis-à-vis the continued resilience in the US economy and the job market. However, keeping the high interest rates for too long will risk creating a sharp slowdown (or even recession) in the US economy. On the other hand, if inflation continues to move lower or
economic conditions worsen significantly, the Fed has the room to bring FFR to more normal levels (and therefore
reduce policy restrictiveness to the economy) or even adopt policy easing to stimulate the economy.
