• In line with market expectation, the US Federal Open Market Committee (FOMC) unanimously left its policy rate unchanged at 5.25%-5.50% for the third straight meeting this year.

• Our take: Although the Fed expect to start cutting rates three times next year, it implies fewer rate cuts than what the market have priced in. This in a way suggest that the Fed is moving closer to easing and tilting towards dovish from a hawkish stance.

• Fed speak: The committee's policy statement explicitly acknowledged that inflation "has eased over the past year," and added that they will closely monitor the economy to determine if "any" additional rate hikes are necessary. This suggest that, after a period of aggressive tightening and a bias towards moving rates higher, they may not need additional rate hikes.

• Press conference: Fed Chair Jerome Powell was quoted as saying that the inclusion of the word “any” reflected a view that the policy rate was “likely at or near its peak for this tightening cycle.” Powell reiterated that the Fed was committed to proceeding “carefully” with future rate decisions, given the expectation that economic growth would cool and there had been “real progress” on beating back inflation.

• Dot plots highlights. Fed members projected that the benchmark rate would end next year at 4.50-4.75%, suggesting three rate cuts in 2024, from a prior projection of two rate cuts. The dot plot showed expectations for rates to fall even lower in 2025, with most officials expect rates to settle between 3.50% and 3.75%. Meanwhile, the market sees up to five rate cuts to 4.00% by the end of 2024 based on CME Group 30-Day Fed Fund futures prices.

• Improving economic outlook: The Fed sees core PCE at 3.2% this year (previous: 3.7%). Inflation is expected to fall further next year to a 2.4% pace (previous: 2.6%). Meanwhile, it sees GDP growth for this year at 2.6% (previous: 2.1%). However, GDP is expected to fall to 1.4% in 2024 before picking up the pace to 1.8% in 2025. The Fed's outlook on the labour market for this year was largely unchanged from the September meeting, while the unemployment rate was forecast to rise to 4.1% next year and remain at that rate in 2025.

• Outlook signals soft landing. Expectations of lower inflation and a resilient labour market raised hopes that the Fed might be able to engineer a so-called "soft landing," where inflation is curbed without triggering a broader economic collapse or a spike in unemployment.

• Bank Negara Malaysia (BNM) Policy Outlook. With a renewed optimism in the US market on Fed’s dovish pivot and the possibility of averting a hard-landing next year, it could provide some level of comfort to BNM to retain its policy stance for longer. Hence, we expect the overnight policy rate (OPR) to remain at 3.00% till the end of 2024.

Source: Kenanga Research - 14 Dec 2023