• As widely expected, the US Federal Open Market Committee (FOMC) unanimously decided to keep itspolicy rate steady at 5.25%-5.50% for the fourthconsecutive meeting this year.

• Our take: We persist in factoring in the possibility of the Fed initiating its first rate cut in June, projecting atotal of four rate reductions this year, compared to theFed's forecast of three cuts. Our expectation isfuelled by an anticipated disinflation rate ofapproximately 0.15-0.20% MoM in the coming datareleases, which we view as prerequisite for the Fedto consider reducing rates.

• Fed speak: The committee does not expect "it will be appropriate to reduce the target range until it hasgained greater confidence that inflation is movingsustainably toward 2.0%." This suggests that the Fedis adopting a wait-and-see approach, with nourgency to cut rates, and emphasises the need formore data before taking further action.

• Press conference: Fed Chair Jerome Powell stated, "Strong hiring, in and of itself, would not be a reason to hold off lowering interest rates" and expressed belief that "ourpolicy rate is likely at its peak for this type of cycle." This suggests that inflation remains a primary concern, and a robustjobs report alone would not dissuade the Fed from cutting rates.

• Dot plots highlights. Despite projecting marginally higher inflation and greater economic growth rate, the Fed is maintaining its expectation of three rate cuts in 2024. The Fed asserts that higher inflationary data over the past twomonths has not altered its overall downward trend. Initially concerned that the Fed might reduce the number of cuts totwo, the market now anticipates three cuts this year, based on CME Group 30-Day Fed Fund futures prices. Notably,the Fed has revised its long-run rate forecasts from 2.5% to 2.6%.

• Amid increasing optimism regarding growth, there is a call for higher rates in the long term. The Fed projects GDP growth to average around 2.0% over the next three years, with a substantial uptick to 2.1% for 2024 (previously1.4%). They have revised their unemployment rate projection downward to 4.0% (previously 4.1%), while core PCE hasbeen adjusted to 2.6% (previously 2.4%) for end-2024. They project a higher Fed funds rate (FFR) of around 3.9%(previously 3.6%) and 3.1% (previously 2.9%) for 2025 and 2026 respectively.

• The Fed sticks to soft landing narrative. Given their optimistic growth forecast and increased long-term FFR projections, there’s growing optimism that a recession might not be necessary for achieving desired outcome. We stillbelieve that challenges may persist in the economy, suggesting that the Fed may achieve a soft-ish landing instead.

• Bank Negara Malaysia (BNM) Policy Outlook. With the growing chances of the US avoiding a hard landing and the Fed’s possible pivot from June, coupled with domestic price stability and robust growth expectations, BNM is likely tokeep its policy unchanged for a while. Therefore, we expect the overnight policy rate to remain at 3.00% until at leastthe end of 2024.

Source: Kenanga Research - 21 Mar 2024