Global Economics & Market Strategy

Economics Weekly View: FOMC Minutes: FFR Hike Whispers Are Getting Louder

24 May 2024
 

Barnabas Gan Acting Group Chief Economist & Head, Market Research

• Are we moving from high, to higher-for-longer FFR environment? We note that the latest FOMC meeting minutes cited “various participants mentioned a willingness to tighten policy further should risks to inflation materialise in a way that such an action became appropriate”. To us, it is clear that there is a severe lack of progress towards the US Fed committee’s 2.0% inflation objective, with Kashkari previously commenting on the need for higher FFR rates should inflation get entrenched at its 3.0% handle for the year ahead. The FOMC minutes suggested that members have questioned the efficacy of the current FFR level to control inflation, with some suggesting that rates were not restrictive enough. The minutes showed “that it would take longer than previously anticipated for them to gain greater confidence that inflation was moving sustainably toward 2.0%”. 
   
• Market swap pricing may indicate two FFR cuts this year, but the truth is that the reality is likely one to zero cuts for the rest of this year. High(er)-for-longer rates will mean global interest rates will stay elevated into the rest of this year, with clear implications for average mortgage rates in the US and selected ASEAN. Global economies may also be forced to keep their benchmark rates high, with the risk of moving even higher, as seen in Japan, Taiwan, and Indonesia. More importantly, traders were quick to engage in short-covering behaviours for the DXY and see UST 10Y yields higher in reaction to last night’s FOMC minutes, thus reinforcing our view that fundamentals will still favour the DXY and UST yields should markets eventually price out FFR cuts into 2H24. As such, we expect the DXY to rally further into the next week, with the dollar index possibly crossing the 105 handle with UST 10Y yields moving towards 4.5 – 4.8% in the quarter ahead. 
   
• The factors for FFR to see one to zero cuts this year are three-fold: (1) US headline inflation, while within market consensus, is still too high for comfort and threatens a year-end price pressure of above 3.0%. Furthermore, (2) the US labour market remains resilient despite the blip in unemployment and nonfarm payrolls, as seen in the recent decline in initial jobless claims for the week ending 11 May 2024, while (3) we recognise the risk for higher Fed Funds Rate is magnified considering yesterday’s FOMC minutes with Fed officials citing the lack of confidence for stable prices. Incoming data (tonight’s U. of Mich Sentiment index, 29 May mortgage applications and 30 May 1Q24 GDP) may give further clarity on how US economic momentum is likely resilient into 2Q24. 
   
• Singapore joins Malaysia and Indonesia in seeing 1Q24 GDP growth exceeding market consensus. Singapore’s GDP expanded 2.7% YoY (+0.1% QoQ SA), surprising our forecasts for a milder 2.2% YoY growth and market’s of 2.5% YoY expansion. We maintain that Singapore’s growth momentum will accelerate in 2H24, translating into a full-year GDP growth of 2.5% in 2024. Lastly, the delay in global disinflation momentum and a resilient economic backdrop will likely persuade the Monetary Authority of Singapore (MAS) to keep its policy parameters unchanged in 2024.
   

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