US policy rate likely on pause mode

AS widely anticipated, the US Federal Reserve (Fed) has again raised its interest rates over the week.

This round – which is its 10th consecutive hike since March 2022 – is by another 25 basis points (bps), which pushes the US federal funds rate (FFR) to 5%-5.25%. The question is, will there be more to come?

According to economists, the Fed is likely done with the latest round of rate hikes, considering that inflation in the United States has gradually eased, while the country’s economy is slowing down due in part to the effects of tighter monetary policy.

UOB Bank Global Economics & Markets Research senior economist Alvin Liew notes the latest Federal Open Market Committee (FOMC) statement has suggested the possibility of a “pause” in US monetary policy stance. Liew also notes that subsequent comments by Fed chairman Jerome Powell in essence signalled that a hike in June is no longer the base case.

While he concedes that Powell did not commit to a pause in June, and did not rule out further rate hikes down the road, Liew argues that the Fed is likely done with the FFR at 5.25%.

“We still expect the May 25-bps hike to be the last one in the current Fed rate cycle, and a ‘pause’ thereafter,” he says.

“We continue to expect no rate cuts in 2023, with the FFR terminal rate at 5.25% to last through this year,” he adds.

Similarly, AmBank Economics Research suggests there is a possibility that the US monetary policy has entered a “pause” mode.

“As the interest rate now is already above the inflation rate, the disinflation trend should continue to materialise going forward...but it is likely to be a slower decline considering the presently tight labour market,” the group says.

“There is a case now that the US monetary policy may have entered a pause mode. Slower credit flows resulting from tightening in the lending condition is likely to be the case,” it adds.

AmBank points out that there are pockets of market participants expecting the Fed to make the first rate cut in July 2023, when the FOMC convenes again after a meeting in June 2023.

Nevertheless, it says, “While the odds for a rate cut sometime in the second half of 2023 is present from the market’s perspective, it would need to be balanced with how the inflation situation develops and eventually the kind of gross domestic product (GDP) momentum for the coming quarters.”

It points out that the FOMC has projected a much slower US GDP growth of 0.4% for 2023, as compared to 2.6% in 2022.

The US annual inflation rate has slowed down to around 5% in March from 6% in February.

According to MIDF Research, as the inflation rate remained above the 2% target, the Fed will likely keep its focus on bringing down inflation through changes in its monetary policy stance.

“We opine the Fed will keep its hawkish stance as the central bank reiterated the intention to engineer below-trend economic growth and adjustment in the labour market condition that will push inflation down towards its longer-term target,” the brokerage says.

“If new data suggests inflation remaining sticky and the economy showing more resilience to cope with rising costs of borrowing, we do not rule out the Fed considering raising its policy rate to a more restrictive level, instead of the pause (or the end of the tightening cycle) as predicted by the market,” it explains.

Over in Asia, the rate hiking cycle is largely over amid moderating inflation and slowing growth for most countries in the region.

According to economists, most major central banks in the region, except for the Philippines, are likely done with their monetary tightening by now.

There are expectations that the Bangko Sentral ng Pilipinas’ (BSP) will undertake two more rate hikes – 25 bps each in May and June – before taking a pause at 6.75% to contain inflation.

Nomura Research expects inflation to hit an average of 5.8% this year, which is well beyond the BSP’s target of 2% to 4%. The investment bank, nevertheless, says a gloomy economic outlook will likely prompt the BSP to reverse course and start cutting its policy rate from March 2024, in line with its expectations of the Fed rate cut by then.

Nomura also sees the possibility of other central banks in the region beginning to ease their monetary policies from late-2023 to support their country’s slowing economies.

For instance, the Bank of Korea is expected to deliver a first 25-bps cut in August this year, leading to a cumulative cut of 75 bps by the end of 2023, according to Nomura.

Similarly, the investment bank expects the Reserve Bank of India, which delivered a 25-bps rate hike to 6.5% in February, to cut its interest rates by up to 50 bps from October to 6% by the end of 2023, as GDP growth and inflation moderate.

Nomura also expects Bank of Indonesia (BI) to start cutting its policy rate, but from early 2024. Overall, it says BI will likely leave its policy rate unchanged at 5.75% this year, helped by a relatively benign inflation outlook.

As for China, Nomura says as inflation is not a major worry, the People’s Bank of China is expected to keep its monetary stance accommodative. It, however, notes that Beijing may be concerned about rate cuts triggering the worsening of capital flight.

Ultimately, all eyes remain on the Fed, as its monetary policy stance continues to have an impact on that of other countries.