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United States Monetary Policy January 2024

United States: Fed keeps rates unchanged in January

At the meeting ending on 31 January, the Federal Open Market Committee (FOMC) left the target range for the federal funds rate at 5.25%–5.50% for the fourth straight meeting, as expected by markets.

The decision was likely driven by the Fed’s desire to assess the impact of past rate hikes, which total 525 basis points since early 2022. Price pressures have come down sharply so far this year, meaning there was no need to continue hiking. On the flipside, it was premature to begin monetary easing given that both headline and core inflation are still both above the Fed’s 2.0% target range and that headline inflation overshot market expectations in December.

Looking ahead, the Fed’s December projections were for the midpoint of its federal funds rate range to end 2024 at 4.6%. This is slightly above the forecasts of our panelists, which are for the upper bound of the federal funds rate range to be around 4.4% by end-2024. That said, the discrepancy among panelists is wide: the spread between the minimum and maximum policy rate forecasts for end-2024 is 275 basis points, reflecting still-notable uncertainty over the paths for inflation and economic growth.

On the latest meeting, DBS analysts said:

“The [Fed] was not ready to declare victory and set the ground for immediate rate cuts. The statement’s tone was less dovish than what the market would have liked, especially the assertion that more supporting data pointing to sustainably 2% inflation is needed before cuts materialise. Strikingly, Chair Powell pushed back explicitly against a March cut during the press conference.”

On the outlook, United Overseas Bank’s Alvin Liew said:

“We keep our more conservative projection for the Fed to maintain its current FFTR at 5.25-5.50% through mid-2024 where we price in 75bps of rate cuts for 2024 (i.e. three 25-bps cuts, one each in Jun 2024, 3Q24 and 4Q24 respectively).”

ING’s James Knightley is more dovish:

“We remain happy with our call that the Fed will wait until May before cutting interest rates. By May we think ongoing subdued core inflation measures will give the Fed the confidence to cut with the policy rate getting down to 4% by the end of this year and 3% by mid-2025. This will merely get us close to neutral territory – the Fed’s view is that 2.5% is likely the long-term average.”

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