Executive Summary

In its second last scheduled Federal Open Market Committee (FOMC) meeting for 2023, the US Federal Reserve (Fed) kept the benchmark Federal Funds Rate (Fed Funds) unchanged at 5.25% - 5.50% as expected.

Fed Funds rate unchanged at 5.25% - 5.50%. The FOMC statement in November does not change much as compared to its September’s statement, stressing on stronger pace of economic growth, low unemployment rate and elevated inflation levels. Chair Jerome Powell said monetary policy is restrictive, but he noted that officials aren't confident financial conditions are restrictive enough to finish the fight against high inflation. We noticed that Bloomberg World Interest Rate Probability (WIRP) did not price in any chance of November’s hike while the probability for December’s hike stood at 24%.

Not ruling out December’s hike still; reiterate that the policy rate is turning restrictive. Another 25 bps hike is still within our baseline viewpoint at this juncture, but we do not see the Fed hiking further beyond 2023. The key difference between now and then is that the bond market seems to be doing the job for the Fed given the faster speed of yields increase at the longer-end of the curve. If the financial condition is tight enough by December, then it is possible that we have actually come to the cycle’s conclusion.

Expect rate cut by mid-2024. We see the Fed to start cutting rate by mid of 2024 with 75 – 100 bps quantum as our baseline forecast and this would eventually bring the Fed Funds rate to 4.50% - 4.75% by the end of 2024. We argue along the factors below:

• Tightening in credit conditions is becoming more apparent.

• Signs of credit & market risks impacts across key agents in the economy.

• Upside surprise in 3Q2023 GDP is not sustainable.

• Core inflation to converge further towards target albeit moderately while unemployment rate to cross 4.0% level in early 2024.

Source: AmInvest Research - 2 Nov 2023