Earlier, the Federal Open Market Committee (FOMC) opted for a 25bps rate hike, pushing the Federal Funds Rate (FFR) to 5.00 – 5.25% target range. This is in line with what was guided by the FOMC’s Summary of Economic Projections, where the median FFR will be at 5.1% in 2023. Furthermore, Fed Chair Jerome Powell did say during the Press Conference that it is inappropriate to cut rates at the moment as inflation did not slow down rapidly. The statement also mentioned “…the Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals,” suggesting that the window for further rate hikes is still open if data suggest it is necessary to do so.
Despite the news surrounding the US financial institution, inflation remains a priority for the FOMC. Overall, the US inflation slowed down to 5.0% in March 2023 (February 2023: 6.0%). The Core Personal Consumer Expenditure (PCE) price index, which is the main indicator that the FOMC pays attention too also slowed down to 4.6% y/y in March 2023. Based on the latest FOMC’s projection, core PCE will slow down further to 3.6% in 2023, which is plausible given price pressure is cooling off. Nonetheless, inflation has proven to be very sticky and how the cumulative 500 bps hikes delivered thus far in this cycle can taper down economic momentum going forward would dictate the speed of any inflation decline.
There are few signs that the US economy is slowing down due to the effect of the tighter monetary policy. Even though the unemployment rate remains low at 3.5%, we observed slower wage growth 3.3% in March 2023 (2022 average: 4.7%), and gain in retail sales ex-auto was also lower at 3.4% over the same period (2022 average: 10.5%).
The FOMC signalled higher FFR than what was previously guided remains possible depending on how economic data turns out. Market participants however have a different view, where most view that the FOMC could be making the first rate cut as soon as the July 2023’s meeting (next meeting will be on 14 June 2023).
As the interest rates now is already above the inflation rate, disinflation trend should continue to materialise going forward, as suggested from historical trend (except during the zero lower bound period post Global Financial Crisis) but it is likely to be a slower decline considering presently tight labour market. There is a case now that the US monetary policy may have entered a pause mode. Slower credit flows resulting from tightening in lending condition is likely to be the case. While the odd for a rate cut sometimes in the 2H2023 is present, it would need to be balanced with how inflation situation develops. Bear in mind that the FOMC projects the US economy to grow by 0.4%, much slower than 2022 actual of 2.6%.
Source: AmInvest Research - 5 May 2023
Created by AmInvest | Sep 19, 2024