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The FOMC meeting is currently convening its final meeting of the year, which began on December 17 and concludes on December 18, 2024.
The consensus among economists and market participants anticipates that the Feds is likely to announce a 25 basis point reduction in the federal funds rate, lowering it to a target range of 4.25% to 4.5% which did happened.
This expected rate cut would mark the third consecutive reduction this year, following similar moves in September and November, each aimed at addressing concerns over economic growth and inflation.
That said, we noticed that post the rate cut, US Treasury yield did not go lower, yet it surprisingly spiked up further. Hence, we believe the Fed is likely to do yield curve control sometime in the near future should this continue to happen.
US 10 Year Treasury Yield
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Recent economic data have influenced this consensus. For instance, the U.S. PPI for November showed a stronger-than-expected increase, suggesting persistent inflationary pressures. Additionally, robust services-sector activity and an Atlanta Fed GDP growth projection of 3.3% for the fourth quarter indicate sustained economic expansion.
These indicators suggest that while the economy continues to grow, inflation remains a concern, prompting the Feds to consider further easing of monetary policy to achieve its dual mandate of maximum employment and price stability.
US Producer Price Index by Industry
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Bank Indonesia maintained the BI Rate at 6.00% in November, aligning with both consensus expectations and our forecast. The lending and deposit facility rates were also kept unchanged at 6.75% and 5.25%, respectively.
This decision reflects a commitment to maintaining controlled inflation within the target range of 2.5% ± 1% for 2024 and 2025, while supporting future economic growth. The central bank's monetary policy is particularly focused on stabilizing the exchange rate amid heightened global uncertainties stemming from the U.S. economy and ongoing geopolitical tensions.
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We perceive that current level of BI-Rate might suppress the government and BI's effort in bolstering domestic consumption as well as liquidity. Our economist team project that the Fed will cut the Fed Fund Rate by 25 bps and will widen the spread between BI-Rate and FFR.
December rate cut by the Fed will provide a much bigger room for BI to cut the rate in January. Furthermore, BI stated that it will continue buying the government bond as a part of its monetary operation that will be bigger than in 2024. We expect this will prevent crowding out risk in 2025.
However, as of this morning, the Rupiah has depreciated over IDR 16,220 per USD amidst the spiking yield.
USD IDR Exchange Rate
Due to this unresolved turmoil in our monetary stability, we recommend to go long on dollar earners company such as ENRG, ADRO, or AADI. Even with these companies, we urge investor to be cautious under currrent negative sentiment on the Rupiah exchange rate as there might be a heavy sell-off before investors started to consider going long on these names.
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