- The Fed issued a more hawkish forward guidance (only one cut this year), but market reaction has been mildly bullish owing to the decline of US inflation in May.
- We reserve skepticism that US inflation would decline fast enough to allow the Fed to cut early, given still-elevated “supercore” inflation and the strong job market, which continues to boost wage growth.
- For the Fed to cut this year, US unemployment would have to rapidly increase, which contrasts with the market’s optimism that there may not be a “hard landing” ahead.
- The USD is likely to remain volatile and reasonably strong, complicating BI policy to maintain the IDR especially amid Indonesia’s growing saving-investment imbalance.
- BI may hike by another 25 bps this year, but the timing is highly uncertain. Concerns about growth, expectations of a future Fed rate cut, and the use of other strategies (SRBI issuance and FX intervention) means that BI is reluctant to hike except under extreme circumstances.
