Investec Chief Economist Annabel Bishop said that the release of the minutes of the Federal Open Market Committee’s (FOMC’s) December meeting created some market risk-off.
This came amid caution on the interest rate outlook, which caused the dollar to strengthen while also creating a significant level of uncertainty.
This saw the rand drop to R18.84/$ (strengthening slightly to R18.62/$).
The FOMC said that a data-dependent approach to making monetary policy decisions is essential, arguing that it will be prudent to keep rates restrictive for some time longer.
Forecasts were also characterised by a high degree of uncertainty, with it possible that the economy could evolve in a way which would make further increases in the target range appropriate.
Although the policy rate is likely at or near its peak for this tightening cycle, rates will still depend on the economy’s evolution.
“Markets initially found the communications from the FOMC difficult to read on the interest rate front, reacting in disappointment to the commentary on maintaining a restrictive stance for some time as markets had been hoping for an early rate cut,” Bishop said.
Although a cut at the next FOMC meeting on 31 January is unexpected, the Fed funds futures have priced in a nearly three-quarter chance of a 25 basis point cut in the fed funds rate at the 20 March meeting.
“Subsequent to the release of the minutes, there has only been a negligible adjustment to these market US interest rate expectations, but when US markets open later this afternoon, there is likely to be more volatility,” Bishop said.
“Markets today have priced in a 100% chance (in the implied the fed funds futures) of close to two 25bp interest rate cuts in the US by the 1st of May FOMC meeting, and the minutes underscore the expectation that the next move will be a cut.”
Almost all of the committee’s participants said that their baseline projections showed that a lower target range for the fed funds rate would be appropriate by the end of the year amid the improvement in the inflation outlook.
However, although the upside risks to inflation appeared to have diminished, the committee said that inflation was still above its longer-run goal and that the progress towards price stability could still stall.
US inflation is projected to average 2.4% in 2024, according to the FOMC (down from 2.6%), whilst South Africa’s inflation is expected to fall to the target mid-point of 4.5% by mid-2024.
“The MPC has communicated its preference for CPI inflation to consistently average around 4.5% before it cuts, which will likely be in H2.24. It will also likely wish the differential between SA and US interest rates to widen as the US cuts first,” Bishop said.
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