PETALING JAYA: Economists believe that the likelihood of another couple of rate cuts by the US Federal Reserve (Fed) in the second half of 2025 (2H25) has grown stronger following May’s producer price index (PPI) and initial jobless claims data, but how this would affect Malaysia is still uncertain, as there could be more influential factors at play.

The PPI measures the average change over time in the selling prices received by domestic producers for their goods and services – the country in question in this case being the United States – while the initial jobless claims refer to the number of people who have filed for unemployment benefits for the first time during a specific week.

PPI numbers for May in the United States showed a modest increase of 0.1% month-on-month (m-o-m), with the year-on-year (y-o-y) rate at 2.6%, slightly up from April’s 2.5%.

While having inched up, this was lower than market expectations, suggesting subdued inflationary pressures and muted effect from the tariffs in the near term.

Combined with a tame consumer price index (CPI) increase of 0.1% in May and a y-o-y inflation rate of 2.4%, the data appear to support the view that inflation is aligning closer to the Fed’s 2% target, potentially widening the path for rate cuts starting in September 2025.

Chief economist for Asia-Pacific at credit insurer Coface Bernard Aw is not surprised, pointing out that markets have been pricing in two to three rate cuts by the end of 2025, with the next cut expected in the September Federal Open Market Committee (FOMC) meeting.

However, he cautioned: “While the current US data appeared to show little impact from the US tariffs, the Fed expects effects to show up in inflation data in the coming months.

“The economic environment remains highly uncertain, which created a split in the view of the 19 FOMC participants over whether to keep hedging for inflation or move ahead with rate cuts to support growth.”

In the June “dot-plot” projections, he said 10 participants expected at least two cuts, seven saw none, while two projected one cut, before telling StarBiz that this uncertainty should favour a gradual approach to rate cutting.

In addition, Aw predicted that Fed rate cuts with no rate easing from Bank Negara will likely contribute to ringgit strength, as the gap between US and Malaysia interest rates narrow, although a stronger ringgit could reduce Malaysia’s trade competitiveness.

“That said, several developments may mitigate such an impact, such as increasing the use of local or regional currencies in regional trade settlements, coupled with the fact that higher value-added Malaysian products such as electrical and electronic goods, machinery, and petrochemicals are less sensitive to prices than commodity exports.

“The concern will be on how volatile the movements in the ringgit will be.

“Rapid appreciation or depreciation will be disruptive for exporters,” he opined.

Economist Geoffrey Williams concurred that it is looking much more probable at the moment for the Fed to cut rates in 2H25, as it “has been signalled by (Fed chair Jerome) Powell, demanded by (US President Donald) Trump and is in line with economic data.”

Echoing Aw’s point that if there are rate cuts, the interest differential with Bank Negara’s overnight policy rate (OPR) will be squeezed, and this will strengthen the ringgit, although it looks like this is already priced into the market, given the current ringgit strength.

“So, the impact will be to stabilise exchange rates to an extent.

“We believe lower rates should also help growth in the United States, which should improve Malaysian exports, but this is still tied up with the tariff settlement due on July 9,” said Williams.

Chief Asia economist and co-head of Global Investment Research Asia at HSBC Frederic Neumann also thinks the market has priced in the Fed rate cuts, while projecting more slashes to come in 2026.

He observed that recent data in the United States have shown some softening in price pressures, including at the producer but also at the consumer level, before adding that the US labour market has also started to weaken at the margin.

“However, markets are looking for non-farm payroll numbers out later to get a clearer picture.

“A rate cut in July by the Fed still appears unlikely at this stage, with the financial markets pricing in a full cut only for September,” Neumann said.

Moreover, he said policy rate cuts by the Fed should help to support US demand growth, and from that perspective, rate cuts are positive for the Malaysian economies.

Nevertheless, mirroring Williams’ point, Neumann said a bigger, near-term question is the evolution of US import tariffs because he believes the exact nature of US tariffs on imports from Malaysia and elsewhere will likely have a bigger impact on near-term growth than rate cuts by the Fed.

“Still, all else being equal, easing by the Fed to the extent that it cushions any slowdown in the United States is a positive for Malaysia,” he said.

Head of dealing at Moomoo Malaysia Ken Low foresees a normalising of global liquidity with the Fed’s signalling of possible rate cuts in the last quarter of the year.

He reckoned bond yields may stabilise, benefitting capital-intensive and domestic consumption-driven sectors, and Bank Negara may join the easing cycle but acknowledged the central bank is likely to remain data-dependent.

“Tactically, there is scope for selective sector rotation. Technology and construction may outperform if growth tailwinds return, while banks stand to benefit from loan growth recovery.

“Commodities and plantations remain tied to global cycles, but with El Niño risks and robust palm oil demand, upside remains plausible,” said Low.

An economist with a foreign brokerage remarked that two or more Fed rate cuts in 2025 would likely strengthen the ringgit, boost capital inflows and provide Bank Negara with flexibility to ease monetary policy, stimulating Malaysian domestic demand.

She said the Malaysian economy would experience a mix of opportunities and challenges due to its integration with global markets, with the impact stemming from changes in capital flows, currency dynamics and trade relationships.

She forecast that sectors like banking, consumer goods, construction, utilities, aviation, and semiconductors would benefit from lower import costs, increased foreign direct investments and higher consumer spending.

“On the other hand, export-oriented sectors like electronics, oil and gas, manufacturing and agriculture could face challenges due to reduced competitiveness from a stronger ringgit and potential US tariffs.

“Malaysia’s economic growth outlook remains sensitive to global trade dynamics, with the central bank expected to maintain the OPR at 3% in the near term but possibly cut rates later in 2025 to support growth,” she added.