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Fed’s Powell cements pivot but pushes back on timing of cuts
US Federal Reserve officials cemented the end of their aggressive campaign to push up interest rates, and sought to reset expectations for how soon and how fast they will cut this year as inflation pressures fade.
While policymakers are shifting their focus to when to start easing policy amid a favourable pullback in inflation, it is clear they are in no rush to lower rates. Against a backdrop of a still-solid economy, Chair Jerome Powell said officials would move patiently and doused speculation that rate cuts would start at the next meeting.
“We’re not declaring victory at all,” Powell told reporters on Jan 31 following the Fed’s policy meeting, emphasizing the need to see “more” data confirming a sustained downward trend in inflation. “I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting.”
“It’s a highly consequential decision to start the process of dialling back on restriction and we want to get that right,” Powell said.
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Market odds for a rate reduction in March, which had risen above 50% in recent days, dropped to close to one-in-three following Powell’s press conference. The S&P 500 slid by 1.6% on Jan 31, and Treasury yields remained lower.
“The messaging is pushing back against complacently assuming the FOMC [Federal Open Market Committee] will cut in March,” said Derek Tang, an economist with LH Meyer/Monetary Policy Analytics. “Data dependency is still the calling card.”
The FOMC voted unanimously to leave the benchmark rate unchanged at a 22-year high — as expected — in a target range of 5.25%–5.5% for a fourth straight meeting.
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Officials revamped the post-meeting statement, dropping a reference to a possible additional “firming” of policy and indicating that it would not be appropriate for the Fed to cut rates “until it has gained greater confidence that inflation is moving sustainably toward 2%”.
Powell repeated those words and pushed back against market expectations for five or six rate cuts this year, saying: “We are prepared to maintain the current target range for the federal funds rate for longer, if appropriate.”
“The Fed feels confident it can wait a while longer before initiating a rate cutting cycle,” said Kathy Jones, Charles Schwab’s chief fixed-income strategist. “There is clearly a concern about making a policy mistake.”
Among the central bank’s concerns is an upward revision to inflation figures. The revised figures for the consumer price index — a closely watched price gauge — set to be released in February could reverse some of the recent improvement from late 2023.
The Fed’s preferred gauge of underlying inflation cooled to an almost three-year low in December. Excluding volatile food and energy, the metric was up 1.9% in December on a six-month annualised basis, trailing the Fed’s 2% target for a second month.
Powell also made it clear that with the economy holding up well in 2023 and the labour market staying strong, he is no longer expecting that significant weakness — which he had called “pain” in the past — is needed to bring down prices. At the same time, unexpected weakness in the labour market would affect the pace and timing of rate cutting, he said.
“There is a concern that much of the low hanging fruit on disinflation has been plucked,” said Diane Swonk, chief economist at KPMG. “The economy is strong enough to hedge against committing the cardinal sin of central banking, which is to cut and have to reverse course and hike again.”
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The central bank reiterated its intention to continue reducing its portfolio of assets by as much as US$95 billion ($127 billion) per month, but Powell said Fed officials plan to start in-depth talks about the balance sheet at their March meeting.
The balance sheet discussions “will stretch out for a quite a while,” said Lou Crandall, chief economist at Wrightson ICAP. He sees the Fed making a decision in June to begin tapering in July. — Bloomberg
MAS keeps policy settings as inflation lingers
Singapore’s central bank kept its monetary policy settings unchanged for a third straight time amid expectations for inflation to ease only later this year — a decision that suggests any easing could be farther down the road.
The Monetary Authority of Singapore (MAS), which uses the exchange rate as its main policy tool rather than interest rates, maintained the slope, width, and centre of the currency band, it said in a statement on Jan 29. The move will keep the local dollar on an appreciating path to blunt imported price gains.
“Core inflation is likely to remain elevated in the earlier part of the year, but should decline gradually and step down by” the fourth quarter, before falling further next year, the authority said in the statement. “Lower imported costs and a slower pace of domestic cost increases should underpin the moderating trend in inflation,” it said.
All 19 economists in a Bloomberg survey had predicted the decision — the first under new managing director Chia Der Jiun. It is also the first policy review since MAS decided to revisit monetary settings quarterly instead of twice-a-year previously.
“The overall statement tilts slightly hawkish,” said Khoon Goh, head of Asia research at ANZ Bank. “Certainly nothing in today’s MPS to hint that they are contemplating easing.” Goh added that the US Federal Reserve’s first rate decision of the year this week and US non-farm payrolls will be the next major drivers for the Singapore dollar in the near term.
The Jan 29 decision extends the MAS’s pause from last year after five rounds of tightening between October 2021 and 2022. Since the last review in October, Singapore’s economic growth has shown signs of resilience with the labour market remaining relatively tight and house-price growth strong. Price pressures, however, linger and risks are exacerbated by the conflict in the Middle East that threatens to push up energy costs.
The MAS’s language on dampening imported inflation and curbing domestic cost pressures indicate “a continued focus on price pressures that suggests the probability of easing this year is lower than many market participants think, in our view”, said Brian Tan, senior regional economist for Asean at Barclays.
While inflation has edged lower for much of the second half of 2023, it has stayed elevated. The central bank’s preferred core inflation gauge — which includes food and fuel prices, and excludes accommodation and private transport — picked up pace in December to 3.3%, exceeding all analysts estimates.
The authority retained its 2024 core inflation projection of 2.5%–3.5%. Excluding the impact of the increase in the goods and services tax rate this year, core inflation is forecast at 1.5%–2.5%. It, however, sees the all-items inflation coming in lower at 2.5%–3.5%, down from the previous range of 3%–4%, amid declines in premiums for car ownership.
MAS also sees the prospects for Singapore’s economy to continue improving in 2024, while retaining its earlier projection for gross domestic product growth of between 1%–3%. — Bloomberg
Singapore investment pledges almost halved to $12.7 billion
Singapore said investment commitments last year slowed to $12.7 billion from a record $22.5 billion in 2022, with authorities viewing the performance as a show of confidence in the city-state in a tough global business environment.
The commitments are expected to create 20,045 jobs over the next five years, according to the Economic Development Board (EDB), the country’s investment promotion agency. About 58% of those jobs are likely to be in services, 26% in research and development and the remaining 16% in manufacturing.
“The flow of investment commitments demonstrate confidence in Singapore as a trusted hub for business, innovation and talent, and a gateway to a growing Asian region,” the EDB said in a statement on Jan 30.
While the latest investment pledges pale in comparison to 2022’s record showing, authorities were not expecting to repeat that performance amid mounting global headwinds.
The EDB said the 2023 commitments were still better than its medium- to long-term goals.
It noted that total business expenditure commitments, estimated job creation and expected value-add to the economy in 2023 were higher than in the previous year.
The EDB warned that the outlook for the current year remains challenging, “due to ongoing geopolitical tensions, policy uncertainty created by electoral contests in many jurisdictions, increased competition for investments and macroeconomic uncertainty”. — Bloomberg
Singapore’s jobless rate stabilises amid signs of cooling demand
Singapore’s unemployment rate remained stable in the fourth quarter, as the labour market remained tight despite signs of cooling demand.
The overall jobless rate was unchanged in December from the prior quarter at 2%, with the annual rate falling to 1.9% in 2023, according to advanced figures from the Ministry of Manpower. Total employment continued to grow for a ninth straight quarter, but at a slower pace with only 8,400 new jobs.
The number of retrenchments eased to 3,200 in the three-month period through December, after a surge of business restructuring on the backdrop of challenging global economic conditions earlier this year.
The latest survey indicates an improvement in business expectations, along with the government’s projection of increasing growth prospects this year. The proportion of firms which indicated an intention to hire in the next three months rose by around 5 percentage points to 47.7%, although downside risks remain in the global economy. — Bloomberg
