Kenanga: BNM May Hold OPR At 3% Till End-2024 As U.S. Fed Holds Rate Steady

As widely expected, the U.S. Federal Open Market  Committee (FOMC) unanimously decided to keep its  policy rate steady at 5.25%-5.50% for the fourth  consecutive meeting this year.

Kenanga Investment Bank’s (Kenanga) Economic Viewpoint today (Mar 21) said they persist in factoring in the possibility of  the Fed initiating its first rate cut in June, projecting a  total of four rate reductions this year, compared to the  Fed’s forecast of three cuts.

Kenanga’s expectation is fuelled by an anticipated disinflation rate of  approximately 0.15-0.20% MoM in the coming data  releases, which they view as prerequisite for the Fed  to consider reducing rates.

Bank Negara Malaysia (BNM) Policy Outlook

With the growing chances of the US avoiding a hard landing and the  Fed’s possible pivot from June, coupled with domestic price stability and robust growth expectations, BNM is likely to  keep its policy unchanged for a while. Therefore, Kenanga expect the overnight policy rate to remain at 3.00% until at least the end of 2024.

Fed speak: The committee does not expect “it will be  appropriate to reduce the target range until it has  gained greater confidence that inflation is moving  sustainably toward 2.0%.” This suggests that the Fed  is adopting a wait-and-see approach, with no  urgency to cut rates, and emphasises the need for “Strong hiring, in and of itself, would not be a reason to hold off lowering interest rates” and expressed belief that “our  policy rate is likely at its peak for this type of cycle.”

This suggests that inflation remains a primary concern, and a robust jobs report alone would not dissuade the Fed from cutting rates.

Dot plots highlights

Despite projecting marginally higher inflation and greater economic growth rate, the Fed is  maintaining its expectation of three rate cuts in 2024. The Fed asserts that higher inflationary data over the past two  months has not altered its overall downward trend.

Initially concerned that the Fed might reduce the number of cuts to  two, the market now anticipates three cuts this year, based on CME Group 30-Day Fed Fund futures prices.

Notably,  the Fed has revised its long-run rate forecasts from 2.5% to 2.6%.

Amid increasing optimism regarding growth, there is a call for higher rates in the long term.

The Fed projects  GDP growth to average around 2.0% over the next three years, with a substantial uptick to 2.1% for 2024 (previously  1.4%). They have revised their unemployment rate projection downward to 4.0% (previously 4.1%), while core PCE has  been adjusted to 2.6% (previously 2.4%) for end-2024.

They project a higher Fed funds rate (FFR) of around 3.9%  (previously 3.6%) and 3.1% (previously 2.9%) for 2025 and 2026 respectively.

The Fed sticks to soft landing narrative

Given their optimistic growth forecast and increased long-term FFR projections, there’s growing optimism that a recession might not be necessary for achieving desired outcome. Kenanga still believes that challenges may persist in the economy, suggesting that the Fed may achieve a soft-ish landing instead.

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