• While the Fed funds rate remained unchanged as expected, Powell's stance was less hawkish than anticipated. The US Federal Open MarketCommittee (FOMC) unanimously agreed to maintainits policy rate at 5.25%-5.50% for the fifth straightmeeting this year.

• Our take: Incoming data remains pivotal for theFed's decision-making process. Recent signs ofslowing economic growth and business activityindicate a slowdown in consumer spending. Shouldthis trend persist, along with any signs of labourmarket weakness, a rate cut may become necessary.Meanwhile, consumers are increasingly dipping intotheir savings and accumulate credit card debt, bothunsustainable practices that could lead to furthereconomic fragility in the months ahead.

• Fed speak: The committee acknowledged thatinflation has eased, but it added that "there has beena lack of further progress toward the Committee’s2.0% inflation objective." This suggests that a meeting-by-meeting approach persists, with future decisions dictated byincoming data.

• Larger-than-expected quantitative tightening (QT) taper. Starting June, the Fed will allow up to USD25.0b inTreasuries to mature per month without reinvesting the proceeds, a decrease from the pace of USD60.0b per monthsince June 2022. Essentially, the Fed will taper QT by USD35.0b which is higher than the consensus (USD30.0b), withthe aim of alleviating potential strain on money-market rates. Fed Chair Powell remarked that “The decision to slow thepace does not mean that our balance sheet will ultimately shrink by less than it would otherwise, but rather allows us toapproach this ultimate level more gradually.”

• Press conference: Fed Chair Jerome Powell stated that an "unexpected weakening in the labour market" could promptrate cuts and expressed the belief that "it is unlikely that the next policy rate move will be a hike." This implies that greateremphasis is placed on job data, and significant weakness may ultimately compel the Fed to reduce rates.

• Fed policy outlook. We anticipate that rate cuts remain a possibility in 2H24, with September emerging as the earliestpotential turning point. Despite stagnant progress on inflation and a resilient job market, we maintain our expectationthat the start of monetary easing would happen this year, though we now project two to three cuts, from four previously.

• Bank Negara Malaysia (BNM) Policy Outlook. Despite the presence of upside risks to prices, inflation is expected toremain manageable, while GDP is projected to experience robust growth, ranging between 4.5% to 5.0%. These factorsare likely to keep the BNM in a holding pattern for the remainder of 2024, maintaining the overnight policy rate at 3.00%.

Source: Kenanga Research - 2 May 2024