Stubborn Inflation Muddies Fed Rate-Cut Outlook
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Economics Research3 May 2024
  • US: Powell's remarks at FOMC suggest that rate cuts would be fewer than indicated in March's dotplot
  • Europe: Encouraging start to the year puts full-year growth on a stronger footing
  • Japan: Upward revision of FY24 core CPI signals confidence in achieving 2% inflation
  • India: Consumer confidence remains upbeat on prospects for the year ahead
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US: “A lack of further progress” muddies rate cut outlook. Noting that there has lately been “a lack of further progress” towards the 2% inflation target, the US Federal Reserve is now set for several months of wait-and-see. Chair Powell’s remarks at the end of the May Federal Open Market Committee (FOMC) meetings suggest that rate cuts would likely be fewer than what was indicated in the dotplot in March (median of three cuts). Rate hikes were ruled out, which in turn implies between zero to two cuts this year.

The key issue is the noise associated with inflation. Goods inflation has eased substantially, but some aspects of core inflation have become a source of concern. If energy and food prices remain steady, as we expect they would, a path toward additional, sustainable disinflation is there for 2Q24, but to paraphrase Chair Powell, confidence in that path has waned somewhat.

On quantitative easing, starting in June, the cap on US treasury holdings the Fed allows to mature would be reduced to USD25bn/month from USD60bn/month previously. Given the record size of auctions ahead, we are certain this would help the bond market. The cap on mortgage-backed securities run-off remains at USD35bn. The UST curve bull steepened amidst relief that the Fed was less hawkish than feared. 2Y yields dipped back below 5% and the market is still factoring in between 1 and 2 cuts by end-2024. Further out the curve, 10Y yields closed above 4.6% after a brief dip towards 4.58%.

With the Fed out of the way, the focus will shift towards nonfarm payroll (NFP) today. Thus far, the labour market has been resilient, and we think it is reasonable to keep that assumption. JOLTs job openings were still elevated at 8.5mn in March while the ADP employment figure beat expectations (actual: 192k, consensus: 183k). In any case, jobless claims have been low in recent weeks. Taken together, consensus of 240k for NFP seems reasonable. Against this backdrop of firm economic activity and sticky inflation, we think US yields would be relatively buoyant.

Figure 1: Fed holds rates steady, citing lack of inflation progress


Source: Bloomberg, DBS



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