• In line with expectations, the US Federal OpenMarket Committee (FOMC) unanimously decided tomaintain its policy rate at 5.25%-5.50%, marking theseventh consecutive meeting without a change.However, it revised its inflation projections upwardand reduced the likelihood of a rate cut to just onepotential reduction in 2024.

• Fed speak: The committee adopted a slightly dovishtone, adjusting its stance on inflation from "a lack ofprogress" to acknowledging "modest furtherprogress" toward the 2.0% target. This shift wasinfluenced by a surprising lower-than-expected 0.2%MoM core CPI reading just before the decision. Assuch, we reckon that further weakness in key datacould increase the likelihood of the Fed implementingmore than just one rate cut this year.

• Press conference: Fed Chair Jerome Powell stated,"if the labour market were to weaken unexpectedly orinflation were to fall more quickly than anticipated, weare prepared to respond." Previously focused solely on the job market, Powell now also highlighted inflation. We believeinflation may continue to cool in the coming months as the pace of home price growth slows, while the labour marketmay continue to weaken despite the above consensus nonfarm payrolls print.

• Dot plot highlights: The Fed projects a marginally higher PCE inflation rate of 2.6% and signals just one rate cut bythe end of 2024, down from three projected in March. However, they maintained their optimistic growth forecast for the2024-2026 period while projecting a higher unemployment rate for 2025 and 2026. Powell remained cautious despitethe lower inflation print, emphasising that the data reflects only one month and underscoring that the Fed will continueto be guided by incoming data. The market now anticipates two rate cuts this year, based on CME Group 30-Day FedFund futures prices. Notably, the Fed has revised its long-run policy rate forecast upward to 2.8% from 2.6%.

• Fed policy outlook: As leading indicators such as the household survey point to significant labour market softening—highlighting a shrinking labour force and increasing difficulty in finding full-time employment—we believe the US economyhas reached a turning point. Both inflation and the job market may continue to weaken in the coming months.Consequently, the time for the Fed to ease monetary tightness is approaching, with September as our forecast for the first rate cut. However, this may not signal the start of a rate-cutting cycle, as the Fed is likely to continue monitoring key data and may only implement another cut in December.

• US Treasury outlook: As we anticipate the Fed to cut rates twice this year, reducing the Fed funds rate to 4.75%-5.00%, the 10-year Treasury yield may approach the 3.95% level by year-end as investors rush to lock in high yields.

Source: Kenanga Research - 13 Jun 2024