The US Federal Reserve (US FED) announced its decision to maintain the Federal Funds Rate (FFR) at a 22-year high for a second straight meeting, within the range of 5.25%-5.50%. In its latest assessment of the economy, the US FED observed that overall economic activity has expanded at a “strong” pace in 3Q23, while employment has moderated since earlier in the year but remain strong. The US FED has revised its characterisation of the pace of economic expansion from "solid" to "robust" in response to more favourable economic indicators published subsequent to their September convening. Concurrently, the US FED has also continued to express concerns regarding the persistence of elevated inflation, attributing it to “tighter financial and credit conditions” for households and businesses, despite the overall soundness and resilience of the US banking system. We also noticed that an inclusion of the term "financial" has been introduced into the language that formerly pertained solely to credit conditions..

The US FED has reaffirmed its objective of achieving maximum employment and maintaining inflation at a rate of 2% in the long run. Consequently, the US FOMC has chosen to maintain the target range for the US FFR to 5.25-5.50%, as the Committee continues to assess additional information and its implications for monetary policy. In light of the persistent inflationary pressures that have exceeded 2% since March 2021 (YoY inflation rate of 3.7% in September), the US FED will carefully consider the cumulative impact of its monetary policy tightening, the time lags involved in the transmission of monetary policy effects on economic activity and inflation, as well as economic and financial developments..

In terms of the balance sheet on asset purchases, the FOMC Committee reiterated that US FED will continue to reduce its holdings of Treasury securities and agency debt and agency mortgage-backed securities. The FED's balance sheet, stemming from its asset purchase program, has undergone a substantial expansion, surging from approximately US$4.2trn in February 2020 to US$7.91trn currently..

Deciphering the Trajectory of US FFR: What Will We See Moving Forward?.

While markets are inclined to believe that the US FED's rate hike campaign may have concluded, driven by natural tightening in financial conditions through elevated market-based interest rates, persistent data indicating a more robust labour market and economic performance has retained the possibility of another rate increase. Nevertheless, we hold the view that the rate hike in July marked the terminus of the current cycle of tightening. Anticipated repercussions from credit contraction induced by financial sector strains and the delayed effects of previous hikes suggest the likelihood of an overly restrictive trajectory. US FED Chair Jerome Powell has acknowledged that the full repercussions of this tightening have not yet materialised. The FED is expected to maintain its policy rate at the terminal level until the threat of inflation resurgence has waned, and substantial increases in unemployment rates become apparent. Consequently, our outlook does not envisage any reductions in the US FFR for the entirety of 2023, with potential signs of a gradual monetary policy easing potentially emerging in latter-1H24..

On the economic front, our assessment suggests that the growth of real GDP is anticipated to maintain a trajectory of approximately 2% in 2023, followed by a further deceleration to a modest 0.5% in 2024. We perceive the associated risks as being evenly balanced. There is potential for incoming data to surpass our expectations, resulting in a softer economic landing. Conversely, the headwinds generated by credit constraints stemming from banking sector stress and delayed repercussions of monetary tightening could also prove more substantial than our current projections.

Source: PublicInvest Research - 2 Nov 2023