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- US: Fed cuts rate by 50 bps, stressing that upside risks to inflation have diminished and the downside risks to employment have increased
- Japan: BOJ likely to signal additional rate hikes in the coming months, potentially at a faster pace to reach a terminal rate higher than expected
- China: Further slowdown as industrial production continues to decelerate amid weak consumption sentiment and higher unemployment
- Singapore: Driven by modern services, particularly finance and insurance, Singapore’s services trade continues to gain importance
US: Fed pivots toward supporting the labour market. The US Federal Open Market Committee cut the Fed Funds rate by 50 bps at the conclusion of its 17-18 Sep meeting. The decision marked a sharp pivot from the Fed’s stance at mid-year when committee members saw higher inflation and a stronger labour market. Fed officials now see 20-30 bps in lower inflation in the 2024-25 horizon while about 20-40 bps in higher unemployment rate during the same period. With forecasts for inflation heading toward 2% and unemployment toward 4.5%, the Fed sees the balance of risk tilting towards the labour market. Today’s policy easing and a substantial change in median forecasts on inflation, unemployment, and Fed Funds rate should be seen in that context.
While we expected the Fed to go for a more cautious approach, given the latest decision, we have revised our forecasts for the Fed Funds rate considerably. We now see the Fed cutting by an additional 50 bps this year, followed by another 100 bps in 1H25. There would be room for an additional 50 bps in cuts in 2H25, in our view. This would take the Fed Funds rate down to 3% by the end of next year, in line with the neutral rate.
Fed Chair Powell stressed that the upside risks to inflation have diminished and the downside risks to employment have increased. He cited data on payrolls growth which has softened compared to earlier this year, as well as the weaker prints on nominal wage growth and jobs-to-workers gap. While conceding that economic growth is still robust, Powell underscored the risk management approach to monetary policy with the need to support the labour market going forward deemed as a higher order of priority.
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