In the last month, statements by officials from the US Central Bank, The Federal Reserve, regarding the direction of interest rates and inflation have tended to create mixed messages, sometimes appearing dovish, but can suddenly turn hawkish.
Senior Portfolio Manager, Equity, PT Manulife Asset Management Indonesia (MAMI), Samuel Kesuma, said in March that the Governor of the Fed, Jerome Powell, stated that the inflation trend was in decline, despite the occasional ‘bumpy path’ of short-term data volatility, and had projected the Fed The Funds Rate (FFR) might fall three times in 2024.
However, in mid-April, Powell stated that the latest inflation and employment data meant that restrictive policies might still have to be maintained for the time being.
“The Fed’s statements which seem contradictory actually show consistency, that they are very data driven in making decisions to cut interest rates. What we need to look at more deeply is whether US inflation which is increasing once more is a ‘bumpy path’ or a structural trend, ” said Samuel, Tuesday (23/4).
In reality, there are several factors that have the potential to support non-inflationary growth, or economic growth with inflation that tends to be maintained.
First, there appears to be a normalization of the supply side of the economy which can increase the availability of goods. Then, increasing labor participation can improve the availability of services.
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“The combination of these two factors should be able to reduce further increases in inflation. We can still hope that the recent stubborn inflation data is due to short-term data volatility,” said Samuel.
The latest developments and comments from the Fed have made the market change expectations for FFR cuts. A combination of various factors, such as the continued strength of US economic data, comments from Fed officials, and increasing geopolitical tensions in the Middle East, have caused market players to change the size and frequency of FFR cuts this year.
“The estimate for the first cut at the end of the second quarter has changed to the third quarter, and the current projection of three cuts has started to change to just two,” said Samuel.
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In other global factors, Middle East geopolitical tensions suddenly increased in early April. The escalation of the Middle East geopolitical conflict sparked by mutual attacks between Israel and Iran certainly weakened sentiment towards risk assets and increased interest in safe haven assets such as gold and the US dollar.
“It cannot be denied that market uncertainty due to suddenly increasing geopolitical tensions is still possible,” said Samuel.
On the other hand, allied countries from the two warring countries appear to be trying to reduce further escalation.
“Because in the end prolonged geopolitical tension will harm sentiment and increase overall global macroeconomic risks,” said Samuel. (Try/Z-7)
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