The US Federal Reserve on Wednesday maintained its benchmark rate at 5.25-5.5% as expected, but surprised the market by reaffirming its outlook for three rate cuts by the end of this year when economists and analysts were shifting toward only two cuts by December.
The release of higher-than-expected wholesales and consumer prices in recent weeks diminished hopes for four or more rate cuts in 2024 as markets were seeing the same amount of cuts as the Fed, which is three.
Prior to the meeting on Wednesday, analysts, notably Nomura, were seeing predictions for only two rate cuts for the first time this year due to the fact that inflation is back on the rise and the Fed cannot afford to pivot yet.
Three months ago, up to eight cuts were expected by the market.
The markets were devastated about the possibility that there could be fewer rate cuts than what the Fed signalled last year for the 2024 outlook. At that time, the markets were thinking that the FOMC were too pessimistic as it turned out they are the ones who are too optimistic.
This time, it was the Fed who was quite optimistic about the US outlook as the Dot Plot indicated that there would be three cuts this year and three more cuts next year with a quarter percentage point of rate cut each time.
The Fed’s post-meeting statement was nearly identical to January’s as the Chairman Jerome Powell said that rate cuts will not be appropriate until officials have more confidence inflation is moving sustainably toward their 2% target.
The market is now pricing in about a 70% chance that the Fed will cut rates in June. Meanwhile, the updated forecast shows FOMC’s current projections are for rates to end 2024 between 4.50-4.75% down 0.75% from current levels. Also, the Fed is now expecting interest rates to end 2025 between 3.75-4%, which is above its December expectations of 3.5-3.75%.
Wall Street was the first to react positively on the Dot Plot with Nasdaq Composite and Dow Jones Industrial Average both settled 1% higher, while the S&P 500 ended 0.90% higher to make a fresh new high.
Asian markets priced in the positive sentiment from the Fed and Wall Street to make a run on Thursday morning with Korea and Taiwan rose 2%, while Japan and Hong Kong saw an increase of around 1.6% and Thailand’s SET Index around 1%.
