Global Economics & Market Strategy

Economics Weekly View: Evidence Continues to Suggest No Rush to Cut (FFR) Rates

29 March 2024
 

Barnabas Gan Acting Group Chief Economist & Head, Market Research

• Yet another US Federal official cited his hesitancy to expect Fed Funds Rate (FFR) cuts. We hear Christopher Waller citing “no rush” to cut rates, adding that recent inflation figures are “disappointing” and the need to see “at least a couple months of better inflation data” before reducing the FFR. He further said, “the progress in reducing inflation has slowed”. We concur with his view; we observe that the US economic output and labour market still show continued strength, while US inflation is far from being on the path towards 2.0%. Similarly, Raphael Bostic, a voting member of the FOMC, anticipates only one rate cut this year. 
   
• We maintain our forecast for the US FOMC to cut its Fed Funds Rate (FFR) by only two times in 2024. We expect FFR to be cut only in 2H24, with the first cut to occur only towards the end of summer (September) and then in December by 25 basis points each, thus bringing the FFR to a year-end range of 4.75 – 5.0% (from current 5.25 – 5.50%). As cited in our previous weekly report, we observe signs that US FOMC members are gradually shifting towards less than three rate cuts in 2024.
   
• The focus will be on further strengthening of the DXY and higher UST 10Y yields, especially if tonight’s US PCE core inflation surprises higher. We maintain our view that a 0.1 – 0.2% MoM core PCE print is imperative to embark on the inflation path towards 2.0%, and in the absence of it, cuts will be premature at this juncture. Market consensus is pencilling a core PCE inflation of 2.8% YoY (+0.3% MoM), and should it come to pass, it suggests price pressures are still too hot for any interest rate accommodation. We keep our forecasts for DXY to head towards 105 – 110 and for UST 10Y yields to head towards the 4.5% handle in the same period. The purported strengthening of the dollar will likely mean further depreciation of the ASEAN FX space, whereby we think the MYR immediate resistance is 4.75 per USD, and if broken, to head towards 4.8 per USD. 
   
• Two key central bankers are not in rate-cutting mode, suggesting that inflation remains to be the key concern for policymaking. Despite market calls for the US FOMC to cut rates this year, a proxy for global rates to fall, rate hikes by the Central Bank of the Republic of China (Taiwan - CBC) and the Bank of Japan (BOJ) likely led market participants wondering if the bets on lower inflation may be misplaced. Note that the CBRC increased its benchmark rate to 2.0% (from 1.875%), whilst the BOJ ended the world’s last remaining negative rate policy, bringing its policy rate to a range of 0.0 – 0.1% (from -0.1%). Both central banks, in their policy decision, cited inflation risks as one of the key reasons for their decision, with BOJ chief Ueda citing “inflation expectations have yet to be anchored at 2.0%”. At the same time, CBC governor Yang mentioned that the hike was intended to curb inflation expectations.  
   
• The caveat for an earlier-than-expected cut will centre on (1) a sharper-than-anticipated decline in US core PCE inflation, (2) a sudden weakening of the US labour market or (3) should the Fed allow inflation to linger near current levels rather than drive it to its 2.0% target. For us, we need to see PCE inflation fade to 0.1 – 0.2% MoM on a sustainable basis before we call for US FFR cuts. A persistent weakening of the US labour market (especially from nonfarm payrolls and initial jobless claims) may also persuade US policymakers to cut rates to achieve maximum employment. A tail-end risk, perhaps, is for the US policymakers to change their goalpost on their inflation targets. 
   

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