FOMC Sept. Meeting Minutes: Officials Divided over Rate Cut Size, A Larger Cut Not Due To Economic Concern

Remarks of Officials

Central Bank

Summary:

The latest FOMC meeting minutes showed that officials were divided over the size of interest rate cuts last month. A substantial majority of participants supported lowering the target range for the federal funds rate by 50 basis points, while a few participants thought a 25 basis point move could be more appropriate. Most participants emphasized that the larger cut should not be interpreted as evidence of a less favorable economic outlook. In considering additional adjustments to the target range for the federal funds rate, they would carefully assess incoming data.

On October 9, ET, the Fed released the latest FOMC meeting minutes, showing that:

Real GDP rose solidly, on balance, over the first half of the year. Real private domestic final purchases (PDFP) posted a stronger first-half increase than GDP. Participants observed that economic activity had continued to expand at a solid pace and highlighted resilient consumption spending. Many participants emphasized that they expected that real GDP would grow at roughly its trend rate over the next few years.

Labor market conditions had eased further but remained solid. The pace of job gains continued to moderate since the beginning of the year, and the unemployment rate had moved up but remained low. Participants agreed that labor market conditions were at, or close to, those consistent with the Committee's longer-run goal of maximum employment. Participants noted, however, that labor market conditions remained solid, as layoffs had been limited and initial claims for unemployment insurance benefits had stayed low. Participants noted that as conditions in the labor market have eased, the risk had increased that continued easing could transition to a more serious deterioration.

CPI and Core CPI inflation were well below their rates from a year ago but picked up slightly. In their discussion of inflation developments, participants observed that inflation remained somewhat elevated, but almost all participants judged that recent monthly readings had been consistent with inflation returning sustainably to 2 percent. Participants cited various factors that were likely to put continuing downward pressure on inflation. These included a further modest slowing in real GDP growth, well-anchored inflation expectations, and a softening in world commodity prices. Members concurred that there had been further progress toward the Committee's 2 percent inflation objective but that inflation remained somewhat elevated.

The staff forecast at the September meeting was for the economy to remain solid, with real GDP growth about the same as in the forecast for the July meeting but the unemployment rate a little higher. Both total and core PCE price inflation were expected to decline further as supply and demand in labor and product markets continued to move into better balance; by 2026, total and core inflation were expected to be 2 percent.

Almost all participants saw upside risks to the inflation outlook as having diminished, while downside risks to employment were seen as having increased. A substantial majority of participants supported lowering the target range for the federal funds rate by 50 basis points. They also emphasized that such a move would help sustain the strength in the economy and the labor market. A few participants also added that a 25 basis point move could signal a more predictable path of policy normalization.

In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent. One Governor voted against this action. The recalibration of the stance of policy at this meeting should not be interpreted as evidence of a less favorable economic outlook or as a signal that the pace of policy easing would be more rapid than participants' assessments of the appropriate path. Members concurred that, in considering additional adjustments to the target range for the federal funds rate, they would carefully assess incoming data, the evolving outlook, and the balance of risks.

FOMC Sept. Meeting Minutes

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Cohen

Economic

Warren Buffett’s Berkshire Hathaway Inc sold a ¥281.8 billion (US$1.89 billion or RM8.11 billion) multi-tranche bond on Thursday in a deal that’s fuelling speculation the legendary investor will increase his exposure to Japanese assets.

The firm priced a seven-part bond deal with tenors spanning three to 30 years in Berkshire’s biggest yen-denominated deal since its debut sale in 2019. All maturities except the three-year tranche offered higher premiums relative to its corresponding yen-note offering in April.

The billionaire’s fundraising in Japan is being closely watched by equity-market investors because Buffett has used yen funds raised in the bond market to purchase holdings in Japanese companies. His stake increases in five major trading houses helped drive up the Nikkei 225 Stock Average to a record high earlier this year. Should Berkshire’s investment choices widen to other stocks such as banks, insurers and shippers, as some analysts speculate, that may lead to more gains for the Japanese market.

The deal was a key test of investor demand for yen-denominated bonds given a shift in Bank of Japan (BOJ) policy this year away from ultra-easy rates. The wider premiums on Berkshire’s longer-tenor debt reflected investors’ caution about the outlook for interest rates.

The 10-year part offered a spread of 82 basis points over mid swaps compared with 71 basis points in April, while a 20-year note carried a premium of 91 basis points versus 78 basis points.

The BOJ is widely expected to hold its settings steady when it next sets policy on Oct 31, and some economists pushed back their forecasts for a year-end hike after new Prime Minister Shigeru Ishiba said last week that conditions are inappropriate for such action.

Source: Theedgemarkets

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Alex

Economic

South Korean bonds got a boost, thanks to the country’s surprise inclusion in a global index and growing bets that the central bank will lower interest rates this week.

Futures on South Korea’s 10-year bonds rose as much as 37 ticks, the most since Oct 2, defying a widespread decline in government bonds overnight. Futures on Korea’s three-year debt gained rose slightly, while the Korean won won slipped 0.2%.

The moves came as the country returned from a public holiday, making Thursday the first time bond traders had a chance to respond to the inclusion of Korean notes in FTSE Russell’s World Government Bond Index, which should ultimately attract foreign inflows of between US$56 billion (RM240 billion) and US$70 billion, according to analysts at Barclays Plc and State Street Corp.

While Korea’s bonds will only join the benchmark from late 2025, the prospect of fresh capital is lifting the debt market ahead of the Bank of Korea’s (BOK) hotly anticipated meeting on Friday, when it is expected to reduce interest rates.

There are only “modest downside risks” against Korea’s 10-year government bond yields heading towards 2.75% by the first quarter of next year, said Jennifer Kusuma, a senior Asia rates strategist at at Australia & New Zealand Banking Group Ltd. The incremental increase in foreign debt demand as a result of the index inclusion, should help mitigate against the risk of rising bond supply in 2025, she added.

Yields on Korea’s 10-year notes are hovering around 3.1%, after declining over the last few months, as investors shifted their interest-rate expectations.

Goldman Sachs Group Inc strategist Danny Suwanapruti said the FTSE Russell announcement was likely a surprise to many in the market, after several banks had predicted the index revision probably wouldn’t be announced until next year. He said the move would provide a “slight tailwind” for both Korea’s government bonds and its currency.

The won will appreciate to between 1,320 to 1,330 per dollar on the back of the index inclusion, according to Kiyong Seong, an Asia macro strategist at Societe Generale SA. The currency traded at around 1,349 on Thursday.

FTSE Russell’s decision was a win for South Korea’s government, which had campaigned for inclusion and made changes to the local market, to win the index provider’s approval. The changes included extending trading hours for the currency, and making it easier for foreign investors to settle their trades through Euroclear, a Belgium-based clearing house.

Most economists expect the BOK to cut rates by a quarter-percentage-point on Friday, as signs of cooling in Seoul’s property market give the BOK the breathing room to join a widespread pivot to monetary easing among global central banks.

Korea’s low yields relative to the US have made the won one of the worst performing currencies in Asia this year, and global funds pulling money from the equity market have contributed to the weakness.

Source: Theedgemarkets

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JanusHenderson

Economic

Stocks

In recent months, as uncertainty about the economy has grown, healthcare has benefited from a rotation into more defensive stocks. In our view, the setup for the sector remains attractive. Still-reasonable valuations, falling interest rates, a quiet U.S. election cycle (at least for healthcare), and rapid innovation all make the case for the sector’s momentum to continue.

A good starting point

As some areas of the market saw rapid multiple expansion during the first half of 2024, the healthcare sector often traded at a discount to the S&P 500® Index. The underperformance reflected investor preference for high-flying areas such as AI and came amid a resetting of supply/demand dynamics in healthcare following the pandemic. Persistently high interest rates also weighed on long-duration stocks, such as biotech.

Healthcare Stocks Shine in a Dimming Economy_1

Since then, healthcare valuations have started to normalize, but some areas of the sector — including those that traditionally hold up well amid economic uncertainty — have not rebounded as much. That includes managed care. The industry was weighed down in 2024 by rising costs as pent-up demand drove a resurgence in medical utilization after the pandemic. A cut in reimbursement rates for Medicare Advantage, a private option for the government insurance program for the elderly, was another headwind.

But we think the industry’s long-term fundamentals more than compensate for these near-term challenges. For one, medical utilization looks set to moderate over the next 12 months as procedural backlogs ease. At the same time, membership volumes are rising: An aging population is expected to drive steady growth in Medicare Advantage over the next decade while enhanced subsidies made available through the Inflation Reduction Act have helped to nearly double the number of people covered by the public insurance marketplace since 2020.1

Insurers can also adjust benefits annually to offset higher costs, aided by industry consolidation that has reduced irrational underwriting cycles. The net result should be less earnings volatility over the long run and a recovery from currently depressed operating and profit margins, which makes a compelling case for the stocks, in our view.

Healthcare Stocks Shine in a Dimming Economy_2

Falling rates, future earnings

Another area of the sector that has lagged — biotechnology — could also be due for improved performance. The industry’s small- and mid-cap stocks suffered a roughly three-year bear market in the wake of Covid-19 and amid rising interest rates. But with the Federal Reserve (Fed) now embarking on a rate-cutting cycle, the industry’s prospects could improve.

Indeed, biotech has typically outperformed during periods of declining rates since low interest rates increase the net present value of future earnings, which in biotech can take years to be realized. As such, the industry has historically delivered gains seven out of eight times in the six months after the Fed’s first rate drop2 and outperformed the S&P 500 by an average of 16% over the following 12 months (Figure 3).

Healthcare Stocks Shine in a Dimming Economy_3

We see potential for the pattern to continue. Today, many small- and mid-cap biotech stocks still trade at depressed valuations. Meanwhile, the industry logged a record number of Food and Drug Administration (FDA) drug approvals in 2023, which could drive revenue expansion for the respective companies for a decade or more. And the pace of innovation continues, with companies reporting clinical progress for the next wave of medical advances in cancer, neuromuscular disease, and autoimmune conditions. In our view, this growth potential could come into sharper focus for investors amid declining rates and a potentially slowing economy.

A quiet election

As the Fed cuts rates, the U.S. presidential election also approaches. In years past, healthcare has been a target on the campaign trail, with candidates often proposing reforms that created uncertainty for the sector. But this year, recent legislative progress has helped to keep healthcare out of the political spotlight.

The Affordable Care Act (ACA), for one, substantially expanded healthcare insurance coverage and has survived repeated calls for its repeal since the law first passed in 2010. With the ACA now firmly engrained in the healthcare system, its dissolution has become more unlikely. Meanwhile, proposals for universal health insurance have been abandoned after they failed to gain traction with voters.

And starting this year, the Inflation Reduction Act (IRA) gave the government authority to negotiate drug prices in Medicare, a major political win. But less well recognized has been the benefit of capping out-of-pocket pharmaceutical costs in Medicare — which previously had no limit — to $3,500 per year in 2024 and $2,000 per year in 2025. The cap has improved access to medicines and made them more affordable for seniors, finally addressing a longstanding political concern. As such, while the election could create volatility for equity markets overall, we do not think healthcare will be especially burdened.

Long-term growth drivers

Without the political overhang, we think the sector’s innovation could be allowed to shine. Here, momentum has been accelerating. This September, for example, marked 10 years since the FDA approved the first PD-1 inhibitor, Keytruda. Since then, Keytruda and other checkpoint inhibitors — immunotherapies that take the brakes off the immune system to kill cancer cells — have become some of the most successful drugs on the market, with sales reaching $52 billion in 2023 and growing at a double-digit rate annually.3 (In June, Keytruda was approved by the FDA for its 40th indication in cancer.)

But checkpoint inhibitors are just one tool in a growing arsenal of novel treatments for cancer. Antibody drug conjugates (ADCs) are targeted therapies that deliver chemotherapy directly to cancer cells, sparing healthy cells in the process. These drugs have the potential to replace the more toxic chemotherapy we have been using for decades and improve outcomes. More than a dozen ADCs are now on the market — many approved in just the last few years — and their potential for growth has spurred multiple mergers and acquisitions, including AbbVie’s purchase of ADC maker ImmunoGen for $10 billion in 2023.

Healthcare Stocks Shine in a Dimming Economy_4

In the field of diabetes and obesity, GLP-1 agonists are achieving unprecedented weight loss and have the potential to reverse the global obesity epidemic while also lowering the risk of comorbidities such as cardiovascular disease. As such, as of the second quarter this year, GLP-1s were annualizing at over $50 billion in sales and growing more than 50% per year.

In medical devices, pulsed field ablation is emerging as a new paradigm for addressing atrial fibrillation (a type of irregular heartbeat) that is safer and faster than prior methods. Meanwhile, the adoption of robotic surgery is allowing procedures to be completed with more accuracy, less pain, faster recovery times, and better outcomes. And the latest robotic surgery systems have 10,000x the processing speed of prior generations.

Many more examples exist throughout the sector, with important clinical trial and product updates expected in the months to come for cancer, obesity, lupus, and schizophrenia. In our view, it all makes for an exciting setup for healthcare no matter what comes next for the global economy.

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Owen Li

Economic

Federal Reserve Bank of Dallas president Lorie Logan said she supports a slower path of interest-rate reductions as the central bank normalises policy away from its highest level in more than 20 years.

Logan said she remains focused on both the inflation and employment sides of the Fed’s dual mandate and outlined several risks in the economic outlook that justify a more measured approach to policy. While she doesn’t vote on monetary policy this year, Logan said she supported lowering borrowing costs at the central bank’s September meeting.

“Following last month’s half-percentage-point cut in the fed funds rate, a more gradual path back to a normal policy stance will likely be appropriate from here to best balance the risks to our dual-mandate goals,” Logan said on Wednesday in prepared remarks for an event in Houston.

The Federal Open Market Committee (FOMC) last month lowered rates for the first time since the onset of the pandemic, cutting by a larger-than-normal 50 basis points amid signs of weakening in the labour market and as inflation cooled towards the Fed’s 2% target.

A narrow majority of Fed officials penciled in another half point of cuts this year, implying a quarter-point reduction at each of their two remaining meetings. Seven officials supported just one additional 25-basis-point cut and two projected that no further reductions would be needed.

Logan, who last spoke publicly about the economy and monetary policy in June, lauded the continued drop in price pressures, saying disinflation has been broad based. The labour market, despite some cooling, remains healthy, she added.

Monetary policy is still restrictive, Logan said, and should continue to weigh on demand for housing and other services.

“Inflation and the labour market are in striking distance of our goals rather than seriously overheated,” Logan said. “Less-restrictive policy will help avoid cooling the labour market by more than is necessary to bring inflation back to target in a sustainable and timely way.”

But she cited various uncertainties in the outlook for each as reason to cut rates at a more measured pace.

Some upside risks to inflation remain, with consumer spending and economic activity still robust, Logan said, and further easing in financial conditions could boost aggregate demand.

“I continue to see a meaningful risk that inflation could get stuck above our 2% goal,” she said.

The Dallas Fed chief also cited measurement issues that make deciphering the labour market more complicated right now. Data revisions, faster immigration, natural disasters and strikes, including a recent action by dock workers on the East and Gulf coasts, all muddy the workforce picture.

“These risks suggest the FOMC should not rush to reduce the fed funds target to a ‘normal’ or ‘neutral’ level but rather should proceed gradually while monitoring the behavior of financial conditions, consumption, wages and prices,” Logan said.

Neutral uncertainty

Logan repeated that the neutral level of interest rates, where they neither weigh on nor stimulate the economy, may be higher now amid increased investment and potentially higher productivity growth. Moving more slowly would allow policymakers to better feel out where exactly neutral is.

“In this uncertain environment, lowering the policy rate gradually would allow time to judge how restrictive monetary policy may or may not be and reduce the risk of inadvertently boosting inflation by bringing the policy rate below its neutral level,” Logan said.

Other policymakers have similarly argued for moving at a slower pace, and Fed chair Jerome Powell urged against assuming the Fed would continue cutting in such large increments. A labour market report released last week showed strong hiring in September and drove down market bets on a larger cut at the Fed’s next meeting in November. Markets now expect a quarter-point cut, followed by another such move in December.

Source: The edge markets

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Cohen

Economic

Poorer households in Germany, particularly single parents and people living alone, are suffering most from rising rental costs, a study showed on Wednesday, amid a looming recession and the country's most severe property market crisis in a generation.

A report by the German Institute for Economic Research (DIW) showed that low-income groups allocate a larger share of their income to rent than wealthier households, with the gap steadily widening.

From 2010 to 2022, asking rents surged by 50% nationally and by up to 70% in large cities, while existing rents grew by 20%. The 20% of households with the lowest incomes spent over a third of their income on rent in 2021, compared to just a fifth for the wealthiest.

Single parents and individuals living alone are particularly vulnerable, spending on average 30% of their income on rent, compared to around 20% for families with children.

The percentage of overburdened households — those spending over 40% of their income on rent — has increased from 5% to 14% over the past 30 years, while social housing stock has declined.

The rise in rents adds to Germans' cost of living crisis which has not eased despite a drop in property demand after a rise in interest rates and building costs.

To address the social housing shortage, the German government in 2021 set a target of building 400,000 apartments annually, but only 294,400 apartments were built last year.

In Berlin, where rents rose by over 40% in 2023 compared to seven years earlier, the city government tried to impose a cap on rent in 2020 which was later overturned by Germany's top court as unconstitutional.

DIW study authors cautioned against broad rent control measures, saying they do not specifically aid low-income groups, instead calling for targeted support for low-income renters and an expansion of social housing.

Source: Theedgemarkets

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Owen Li

Economic

Taiwan-listed Ennoconn Corp’s bid to acquire Nera Telecommunications (NeraTel) at $0.075 a share is being met with opposition, with the Securities Investors Association (Singapore), or Sias, advising shareholders to reject the offer.

In a statement on Oct 9 evening, Sias’ founder and chief executive David Gerald pointed out that this sentiment was shared by both the appointed independent financial adviser (IFA) SAC Capital – which believed that the price was “not fair and not reasonable” – and NeraTel’s independent directors (IDs).

The word “mandatory” in the offer description does not mean that all shareholders are legally obliged to accept the offer, he added. “Everyone is perfectly entitled to hang on to their shares if they so wish, this being all the more so given the advice of the IFA.”

Furthermore, Ennoconn had emphasised in its offer that it will not revise its price, it does not expect to exercise any rights of compulsory acquisition, and that it intends to retain NeraTel’s listing status.

“SIAS’ recommendation is therefore the same as the IFA and the IDs – shareholders should reject the offer,” said Mr Gerald.

Earlier in September, NeraTel had received an offer from Ennoconn for all the shares in the company it does not own at $0.075 apiece.

This came after Ennoconn entered a share purchase agreement with Asia Systems for the purchase of close to 193.2 million shares in the issued and paid-up ordinary share capital of NeraTel for $0.075 per share. That represents nearly 53.4 per cent of the total number of shares in NeraTel.

As Ennoconn acquired over 50 per cent of NeraTel’s shares, a mandatory unconditional cash offer for the remaining shares it does not own was triggered.

The $0.075 offer price was a 5.1 per cent discount to the volume-weighted average price (VWAP) of the shares traded in the month prior to the offer, and a 3.8 per cent discount to the VWAP of the shares traded in the three-month period prior to the offer.

Source: Straitstimes

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