According to a special report from Economic Digest on the 21st, as expected, the Federal Reserve announced maintaining interest rates unchanged but raised the annualized forecast for the Personal Consumption Expenditures Price Index to 2.6% for this year. Chen Weiquan, Deputy General Manager of Private Banking at Bank of China Hong Kong (02388-HK), believes that there are two key points to focus on in this interest rate decision. First, following the interest rate decision in December last year, the Fed updated its interest rate dot plot, showing that the median federal funds rate by the end of this year remains at 4.6%, consistent with the previous update. This reflects an anticipated potential rate cut of 0.75% by the end of 2024 and another cut of 0.75% by the end of 2025, which is less compared to the previous forecast of a 1% cut. Second, the Fed is starting to discuss slowing down the pace of quantitative tightening. Although there was no conclusion or detailed timetable in this interest rate decision, it is estimated that more details will be announced in future Fed meetings.
Positive Impact of Interest Rate Direction on Asset Markets
Chen Weiquan pointed out that while there were no significant changes in the outcome of this interest rate decision, it still indicates that the Fed’s direction regarding interest rate peaks remains unchanged. Apart from slightly raising inflation forecasts, the Fed will scrutinize economic data trends more cautiously. On the other hand, if the Fed starts considering slowing down quantitative tightening, it signifies their attention to changes in market liquidity, particularly as the overnight repurchase agreements in the US have decreased significantly from their high levels over the past two years. Overall, the direction of this interest rate decision has a positive impact on asset markets.
Investors Should Continue to Monitor Market Liquidity
Chen Weiquan expects that the current interest rate futures market reflects actions by several major central banks, including the European Central Bank and the Bank of England, possibly beginning rate cuts in June this year. With the recent decision of the Bank of Japan to end negative interest rates while maintaining loose monetary policy, global risk assets are currently in a favorable situation. The actions of major central banks are highly dependent on economic data trends and are closely related to market liquidity. Therefore, investors should pay attention to the latest economic data and market liquidity indicators, such as the Bloomberg US Financial Conditions Index, which has risen to higher levels in the past two years, indicating relatively ample market liquidity. Investors should assess trends for any changes and make timely and appropriate hedging arrangements.