Rate Cuts Expected from Federal Reserve and Bank Indonesia in 2024, Timing Uncertain

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The recent decisions made by the Federal Reserve have reverberated across global financial markets, with Indonesia experiencing notable impacts on its currency, the rupiah, as capital flowed back to the United States. Investors, seeking relatively secure returns amidst uncertainties, shifted their focus, leaving emerging economies like Indonesia vulnerable, despite their potential for higher returns albeit with increased risk.

Federal Reserve:

The Federal Open Market Committee (FOMC) meeting minutes from December 12-13, 2023, suggest a potential rate cut in 2024, reflecting a sentiment among most Fed officials. However, these minutes also underscore an “unusually elevated degree of uncertainty” regarding the path forward. Some members advocate for maintaining or even raising rates to rein in US inflation, which currently stands at around 2.6% (y/y), slightly above the Federal Reserve’s 2.0% target rate. However, the downside of elevated rates lies in their potential to stifle economic growth, possibly leading to a mild recession.

Chairman Jerome Powell’s earlier indications of rate cuts in 2024 were well-received by financial markets, driving Indonesian stocks to record highs in December 2023 and early January 2024. However, the recent FOMC minutes suggest a shift towards uncertainty regarding rate adjustments.

Despite this uncertainty, the Indonesia Stock Exchange continues its upward trajectory, influenced by interest rate dynamics that impact borrowing costs and business expansion opportunities.

Market expectations now reflect anticipation of multiple rate cuts in 2024, although the timing and frequency remain uncertain. The Federal Reserve may opt to wait until inflation aligns with the 2.0% target before implementing rate cuts. Acting prematurely while inflation remains above the target could undermine the central bank’s credibility.

According to various analysts cited in mainstream media, the latter half of 2024 appears favorable for rate cuts, contingent upon US inflation reaching the 2.0% threshold. This cautious approach reflects the Federal Reserve’s aim to balance economic stability with inflationary pressures.