KUALA LUMPUR (Dec 19): The US Federal Reserve’s (US Fed) intent to adopt a slower pace of interest rate easing in 2025 is expected to prompt slight downward pressure on the domestic market, analysts said.

The US' central bank concluded its final monetary policy meeting of 2024 with a widely expected 25 basis points (bps) cut, putting the Federal Funds Rate (FFR) at 4.25-4.5% on Wednesday.

More pertinently, the US Fed gave out hawkish signals amid raised inflation estimates for 2025 at 2.5% in the world's largest economy, from its initial projection of 2.1%, against its 2% target.

The ringgit fell as much as 1.03% against the US dollar in the early session Thursday. The local currency last traded at 4.5055. Bloomberg’s mean consensus forecast stood at 4.46 against the greenback prior to the Fed announcement.

Looking at the domestic market’s reaction, the FBM KLCI was down for the majority of Thursday, falling as much as 0.55% to 1,590.83 points, but recovered to close steady with a 0.03% gain to 1,600.09.

Across the wider market, decliners led gainers with 693 stocks in the red while 369 stocks traded higher. Some 540 counters traded were unchanged.

“We expect markets to react slightly negatively over the near term repositioning for lesser FFR cuts in 2025,” Apex Securities head of research Kenneth Leong told The Edge.

Leong explained that the US Fed’s slower rate cuts suggest a wider-than-expected yield differential between the FFR and Bank Negara Malaysia’s (BNM) overnight policy rate (OPR), supporting the US dollar.

“Consequently, foreign funds are expected to remain in net selling on Bursa Malaysia with funds flowing back to the US,” he added.

Consensus forecast for US interest rate now pegs three 25 bps cuts to 3.5-3.75% by end-2025, versus a prior forecast of four 25 bps cuts to 3.25-3.5%. In response to the news, Asian markets slipped while the US dollar index ascended to a two-year high.

BNM’s OPR stands at 3%, deriving a 125-150 bps differential from the FFR.

The OPR is expected to stay pat at 3% throughout 2025, according to economists’ consensus forecast. BNM is set to hold its next monetary policy meeting on Jan 23-24, while the US Fed’s next meeting is on Jan 28-29.

Meanwhile, Rakuten Trade Sdn Bhd vice-president of research Thong Pak Leng attributed Thursday’s downward sentiment to “panic selling”.

Separately, Areca Capital Sdn Bhd CEO Danny Wong underlined the importance of treading cautiously and observing the progress of inflation in the US.

“The US job market seems resilient, and though prices may still be in a bubble, inflation is now under control. But 2025 has its own challenges in view of [President-elect Donald] Trump’s America First policy,” Wong said.

“It is likely another data-driven decision, with both sides of the view to affect market sentiment,” he added, expecting one or two 25 bps cuts to the FFR in 2025.

Regardless, Wong concluded that the uncertainty is unwelcome by the market. “However, with the right stock selections, where we will focus more on those sectors and stocks with clearer catalysts and earning visibility, we look forward to seeing another good year.”

In view of a stronger US dollar, Apex Securities’ Leong named export-oriented sectors such as technology, gloves and plantation to be beneficiaries.

Looking at economists’ views, MIDF Research maintained its expectation for the US Fed to carry out two cuts in 2025, while acknowledging the latter's "cautious" stance amid renewed inflation expectations.

UOB Research, separately, reiterated its projection of three 25 bps cuts to the FFR, taking the position that it was premature to shift its projections as it awaits clarity in Trump policies early next year.

Trump, who drummed up import tariffs and protectionist policies in his election campaign, is set to return to the White House as president in January 2025.

Since winning the US presidential election in November 2024, Trump has announced various proposed policy moves, including higher trade tariffs, tax incentives towards reshoring manufacturing and production, and mass deportation of migrant workers.

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