Economist Predicts The Fed Will Maintain Interest Rate 5.5 Percent

JAKARTA - Senior Economist Rully Arya Wisnubroto projects that the US Central Bank or Federal Reserve (The Fed) will still maintain the benchmark interest rate or Fed Funds Rate (FFR) at the level of 5.5 percent in September 2023.

The Fed's decision to raise or maintain the benchmark interest rate will be discussed at the Federal Open Market Committee (FOMC) meeting on September 20, 2023.

"It seems that the probability in September is still very small. If you look at the expectations of the market above 90 percent for the probability of staying at 5.5 percent," said Rully on Media Day: September 2023 by Mirae Asset Sekuritas in Jakarta, quoted from Antara, Wednesday, September 13.

Rully explained, the Fed will be careful in making decisions to maintain interest rates. After the COVID-19 pandemic, the direction of the Fed in making decisions is very dependent on existing data (data dependent), especially those related to inflation and employment levels.

"That's because they have raised it very aggressively from the beginning of 2022, from 0.25 percent, currently 5.5 percent. They still have to be careful, because if they are too aggressive in raising interest rates, this will affect economic growth, while if they are less aggressive it will have an impact on inflation which will continue to rise," said Rully.

However, Rully assessed that it is still very open to the Fed's possibility to raise higher interest rates in the next meeting in November and December, given that there are still three committee meetings.

This year, the Fed is expected to still raise the benchmark interest rate to 25 basis points (bps) at the level of 5.75 percent. It is likely that the increase will occur at a FOMC meeting in November with reference to market expectation data that records 43.6 percent expect an increase in the Fed interest rate.

This is due to the level of US inflation which is still quite high at the level of 3.2 percent in July 2023. Then the inflation of the US Core Personal Shopping Price Index (PCE) which is currently being closely monitored is also considered high. PCE inflation has gradually dropped to 4.3 percent in July 2023, although it is recorded that it still exceeds the target of the Fed which is 2 percent.

"In November, they will still be dependent data, but if we look at the inflationary conditions that are still above the target, namely 2 percent, maybe the Fed still has to keep raising interest rates. If we look at 25 bps to 5.75 percent," he explained.

Furthermore, Rully added that if the Fed interest rate rises to the level of 5.75 percent, it will be equivalent to the benchmark interest rate of Bank Indonesia or BI-7 Day Reverse Repo Rate (BI7DRR). According to him, BI has anticipated the Fed's move.

Last week, Bank Indonesia (BI) Governor Perry Warjiyo also estimated that the Fed's interest rate would still have the potential to increase by 6 percent. As an anticipatory measure, Perry said that BI would continue to take stabilization steps to prevent the impact of the uncertainty of the global financial market.