As usual, the Federal Reserve monetary policy decisions impacted heavily on global financial markets, with Indonesia particularly feeling this through the rupiah, as capital flew back to the United States (from emerging economies), with investors being in search of lucrative returns with almost zero risk (while emerging markets typically offer even more lucrative returns but with a high degree of risk).

Federal Reserve

The Federal Open Market Committee (FOMC) minutes from its two-day meeting on 12-13 December 2023 suggest that most Fed officials feel the benchmark interest rate can be cut in 2024. However, the minutes also state that there is an “unusually elevated degree of uncertainty on how to get there”, with some members preferring to keep rates elevated, or, even raise them higher in an effort to bring US inflation down to the Federal Reserve’s target rate of 2.0 percent (y/y). Currently, US inflation is still around 2.6 percent (y/y), and so there is still some distance to cover. But the negative aspect of keeping interest rates elevated is that this undermines economic growth and so it can push the US economy into a mild recession.

Prior to the release of the FOMC minutes, Chairman Jerome Powell had given some signals that the central bank would cut rates in 2024, which was warmly welcomed by financial markets, hence Indonesian stocks too touched record highs in December 2023 and at the start of January 2024. However, this dovish stand now seems to be replaced with a more uncertain stand by the FOMC minutes.

Still, when we take a look at the Indonesia Stock Exchange, this doesn’t seem to be a negative matter as they keep going up. As is known, stocks are highly affected by the changes in interest rates as cheaper borrowing costs make it cheaper for businesses to engage in expansion.

So, it certainly seems to be the case that markets are now pricing in a number of rate cuts in 2024. However, when and how many times are among the key questions. It seems plausible that the Federal Reserve will wait for inflation to touch 2.0 percent before cutting rates. If not, if it starts cutting while inflation is still above 2.0 percent (y/y), it might lose some credibility, and that is not something a central bank wants to see happening. When we take a look at mainstream media, then there are various analysts who argue that the second half of 2024 seems like a fitting time to cut rates provided US inflation has at 2.0 percent (y/y).


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