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7 Jun 2024

Econ Digest

FOMC Meeting, June 11-12, 2024: Fed expected to maintain its policy rate and signal fewer rate cuts

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        At the upcoming FOMC meeting slated for June 11-12, 2024, it is anticipated that the US Federal Reserve (Fed) will maintain its policy rate at 5.25-5.50%. Attention should be paid to the Fed’s signal regarding future policy interest rate cuts. KResearch views that at the upcoming meeting, the Fed’s stance may not largely differ from the last meeting, signaling a prolonged high interest rate period. The Fed may signal fewer rate cuts than the three cuts signaled in March 2024, as US inflation is decreasing slowly and remains stubbornly above the Fed’s target. The US real estate market remains strong despite rising financing costs, with sales volume and housing prices continuing to increase, in which case housing and other services prices remain the main driver of US inflation. However, housing-related expenses will show a tendency to gradually decline in the second half of this year due to slowing demand. As a result, overall US inflation will gradually decline towards the Fed’s target.

        Meanwhile, the overall US labor market remains robust, though it is constantly moving toward equilibrium. The US unemployment rate rose to 3.9% in April 2024, while US non-farm payrolls increased by 175,000 jobs, fewer than the market expected. Regarding economic projections, the Fed’s view on this year’s economic growth will not change significantly, compared to the last projection. The US economy is expected to expand around 2% this year and is likely to gradually enter a “soft landing” state going forward amid signs of slowing consumer spending. This is reflected in flat retail sales in April 2024 as compared to the previous month and the US consumer sentiment falling sharply in May 2024 to a 6-month low.

        KResearch views that the Fed may cut the policy rate twice this year, in line with the broader market sentiment, which increasingly expects two rate cuts following the recent slower-than-expected US labor market data. Additionally, there is pressure from several central banks that have already started to gradually reduce their policy rates such as the Swiss National Bank and the Bank of Canada. Most recently, on June 6, 2024, the European Central Bank decided to reduce its policy rate by 0.25%. Based on Fed Funds Future of CME Fedwatch Tool as of June 3, 2024, the broader market expects that the Fed may cut its policy rates twice this year, likely at the September and December 2024 meetings. However, there is still a possibility that the Fed might cut rates less than expected if US inflation does not significantly decrease in the near future. The Fed may want more confidence that inflation is moving towards the 2% target before cutting its rates.

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