In a widely anticipated move, the Federal Open Market Committee (FOMC) opted to keep the federal funds target rate unchanged at 5.25% - 5.50%, echoing concerns about persistently high inflation.
Annabel Bishop, chief economist at Investec, notes that the decision aligns with the acknowledgment that while inflation has eased from its highs, uncertainty persists, and progress in curbing inflation is not guaranteed.
The FOMC emphasised the positive aspect of inflation moderating without a substantial rise in unemployment, hailing it as good news.
However, the committee remains firm in its stance that inflation levels are still too high, emphasising the need to restore price stability.
The committee acknowledged the impact of its restrictive monetary policy on economic activity and inflation.
“Our restrictive stance of monetary policy is putting downward pressure on economic activity and inflation. Over the past two years, we have raised our policy rate by 5-1/4 percentage points.”
The swift tightening of the U.S. interest rate cycle has notably subdued activity levels in the housing market due to elevated mortgage rates, with business fixed investment also hampered by increased borrowing costs, said Bishop.
While indicating that the current policy rate might be at its peak for this tightening cycle, the FOMC adopted a cautious tone, acknowledging the unpredictable nature of the economy since the pandemic.
They hinted at the possibility of easing policy restraint later in the year if economic conditions unfold as expected.
Bishop said that the response in the financial markets was marked by a slight strengthening of the rand to R18.57 against the dollar initially, only to retrace to R18.73.
The economist said that market attention is now focused on May as the potential timeline for the first rate cut, with further analysis of the FOMC statement expected throughout the week.
Despite the speculation, the FOMC cautioned against premature rate cut expectations, expressing a willingness to maintain the current target range for the federal funds rate for an extended period if deemed appropriate.
The committee underscored the potential risks of reducing policy restraint too soon, emphasizing the importance of maintaining progress in inflation containment.
Looking ahead, Bishop said that the likelihood of an FOMC rate cut before May appears low, possibly occurring at the June meeting.
For South Africa, the South African Reserve Bank (SARB) is unlikely to cut rates before July, aligning with the Forward Rate Agreement (FRA) curve, which indicates a potential -25 basis points cut in July.
Market dynamics will continue to hinge on U.S. data releases and evolving economic conditions leading up to the next FOMC meeting, said Bishop.
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