The Fed’s FOMC decided to maintain the existing target of fed funds rate (FFR) at 5.25-5.50% after the Mar-24 policy meeting. The move was similar to market expectations, as the Fed has been signalling its cautious approach to future policy adjustment, waiting for more convincing evidence that the US inflation is moving sustainably lower before considering for rate cuts. Aside from keeping FFR unchanged, the Fed will continue to reduce its holdings of financial securities (i.e. Treasury and mortgage-backed securities) as part of its quantitative tightening; since the peak in Apr-22, the Fed’s total holding of securities has dropped nearly USD1.5t. This suggests the Fed continues to tighten its monetary policy as the latest inflation reading remained elevated albeit having eased from the multi-year highs as a result of the Fed’s aggressive rate hikes.
Despite the upward revision to growth and inflation, the FOMC members still predicted the fed funds rate would be slashed to median 4.6% this year and to be cut further to 3.9% next year (Dec-23 forecast: 3.6%). This suggests the FOMC still projected there will be policy easing that will reduce the level of policy restrictiveness later this year. Apart from the moderating inflation, the Fed Chair indicated that any significant weakening in the job market will also allow the Fed to begin cutting rates, given the Fed’s mandate to ensure price stability and maximum employment. For now, the Fed kept its cautious approach to rate reduction given the strength in the US economy and still elevated price pressures.
As the underlying core inflation remains on the moderating trend, MIDF in its opinion foresees the Fed to likely cut its policy interest rate in the latter half of 2024. Understandably, the current policy setting of high interest rates is maintained to ensure inflation will move lower towards the Fed’s 2% target. At the same time, the continued strength in the US job market and consumer spending could also support the US economy to grow sustainably, and may even avoid a “soft landing” as the pace of growth is expected to remain at normal levels. Nevertheless, apart from the continued resilience in the US economy, there is uncertainty that inflation will remain elevated for a prolonged period, which can be due to the persistently strong demand and wage pressures.
This could cause a further delay in the Fed’s decision to cut interest rates. On the flip side, if the US inflation moves sharply lower or macroeconomic conditions worsen significantly, the Fed could switch to policy easing to stimulate the economy
