Market is Pricing in Too Many Fed Rate Cuts!

BlackRock Inc chief executive officer Larry Fink said the market is pricing in too many interest-rate cuts from the Federal Reserve (Fed), given that the US economy continues to grow. 

Money markets imply a one-in-three chance the Fed will deliver another half-point cut in November, and price in a total of about 190 basis points of easing by the end of 2025. But Fink said it’s hard for him to see that materialising, as most government policies now are more inflationary than deflationary. Fink expects the US economy to continue to grow at a 2% to 3% pace. 

The Fed lowered borrowing costs by a half percentage point in September to preserve the strength of the US economy as risks to the labour market mount. It was the first reduction since 2020 and a larger-than-usual move. 

Fed chair Jerome Powell said recently the central bank will lower interest rates “over time” and emphasised that the overall US economy remains on solid footing. He also reiterated his confidence that inflation will continue moving towards the 2% target.

 

If the cuts came close to 200 basis points, the Fed Fund rate will drop to 3.25% by end 2025. Then real interest rate in the U.S. is 1.25%, if inflation drops to 2%. For Malaysia, the real interest rate differential could be 1% (OPR @ 3% and inflation at 2%). The U.S. is still positive 0.25% compared to us. What will that mean? We may not be able to sustain exchange rate appreciation to the RM4.10 to USD1. Moreover, we could see depreciation from current levels. Predicting exchange rate is more of an art than a science, since speculators, including banks play a significant role.

 

Reference:

Market pricing in too many Fed rate cuts, says BlackRock’s Fink, Anchalee Worrachate and Loukia Gyftopoulou, Bloomberg/CEO Morning Brief, 1 October 2024