Economist: The Fed's Interest Rate Reduction Will Reach 75-100 Bps In The Remainder Of 2024

JAKARTA - Chief Economist of PermataBank Josua Pardede said that market expectations (markets) for the decline in the United States (US) interest rate or Fed Fund Rate (FFR) reached 75 to 100 basis points (bps) in the remainder of this year, after the inflation rate in June fell.

"If we look at the latest data on August 7 yesterday, the market currently sees that there is an opportunity for the Fed to cut its interest rates in September by around 50 bps, in November around 25 bps, and in December around 25 bps. So this year's total, throughout the remainder of this year, the market sees a room of around 100 bps for a Fed rate reduction," Josua said in a virtual "PIER Economic Review: Mid-Year 2024" in Jakarta, quoted from Antara, Thursday, August 8.

Josua reminded that high US inflation drivers in 2022 and 2023 mostly come from core components (core inflation). In 2022 when the war between Russia and Ukraine peaked, the logistics cost or transport cost was also one of the drivers of US inflation.

However, despite the geopolitical tension of Russia and Ukraine as well as the added geopolitical tension in the Middle East still continues to this day, the trend of US inflation is starting to subside or disinflation continues so that this is one of the considerations for cutting the Fed's interest rates starting this year.

Then, the current US unemployment rate has actually exceeded the target of the Fed itself. So if we refer to inflation assessments and also assessments from the labor market side in the US, the momentum to lower interest rates is quite relevant," said Josua.

Head of Macroeconomics & Financial Market Research PermataBank Faisal Rachman added, Bank Indonesia (BI) also has room to cut its interest rates if the decline in US interest rates is in line with market expectations.

In addition to considering the US interest rate, explained Faisal, BI will consider the level of domestic inflation and external balance conditions. He reminded that Indonesia's inflation is currently at a maintained level. Then from the external side, despite the risk of widening the deficit in the current account balance, it can still be said to be small or far below the average before the pandemic.

And we also see that the surplus (on the side of the trade balance) is still continuing. Even though the surplus trend is shrinking, it is still continuing its trend. And we see, maybe until the end of this year, the surplus will continue even though it is in a downward trend," added Faisal.

With these indicators, continued Faisal, it has actually opened up space for BI to be able to cut interest rates this year. The expectations of cutting BI interest rates are also getting stronger if they are later supported by improving global conditions such as the dovish signal from the Fed, improving geopolitical tension, and certainty regarding the election results in the US.

"I see that the Fed can do a multiple cut rate, so that opening up space for BI can cut it once to twice this year," said Faisal.