As expected, the US Fed hiked its benchmark interest rate by 25 basis points (bps) that now takes the rate to a range of 2.00%–2.25%, last seen in April 2008. In its process towards the normalization, the Fed dropped the phrase "the stance of monetary policy remains accommodative". The Fed also upped 2018 and 2019 GDP growth to 3.1% and 2.5% respectively but maintained the long-run forecast at 1.8%.

By having raised the GDP growth, it provides ample room to continue raising rates. This would mean that another rate hike in December 2018 is almost certain with 3 rate hikes in 2019 and one more hike in 2020. The policy rate should now normalize at 3.50%. However, we feel the Fed is now looking at an economy that will slow down in 2021. That would mean that the rates could settle around 3.00% in 2021. Outside of the rate hike and drop of the phrase, the statement was verbatim from the August meeting.

• As expected, the US Fed hiked its benchmark interest rate by 25 basis points (bps) that was made unanimously and the statement ran just 290 words. It now takes the rate to a range of 2.00%–2.25%, last seen in April 2008. This is the eighth increase since the Fed began normalizing policy in December 2015.

• In its process towards the normalization, the Fed dropped the phrase "the stance of monetary policy remains accommodative", something we were expecting. The committee members also indicated that it is likely the funds’ rate would remain for two years above what it termed the long-term "neutral" rate that is neither restrictive nor stimulative.

• The Fed also upped 2018 GDP outlook to 3.1% from previously 2.8% which is what we have also projected. Also, the Fed revised upwards 2019 GDP to 2.5% from 2.4% previously, which falls in line with our projection. Their estimate for 2020 is 2.0%, marginally higher than our forecast of 1.9%. However, the Fed maintained the long-run forecast at 1.8%.

• By raising the GDP growth, it provides ample room to continue raising rates. This would mean another rate hike in December 2018 is almost certain with 3 rate hikes in 2019 and one more hike in 2020. The policy rate should now normalize at 3.50%. However, we feel the Fed is now looking at an economy that will slow down in 2021. That would mean that the rates could settle around 3.00% in 2021. Outside of the rate hike and drop of the phrase, the statement was verbatim from the August meeting.

• Translating into Malaysia’s policy rate, we believe the current 3.25% overnight policy rate (OPR) is expected to stay throughout 2018. That means the Bank Negara policy meeting on November 8 will result in no change to the 3.25% OPR rate. However, we have factored in a 25bps rate hike in 2H2019, bringing the “neutral” level to 3.50%.

Source: AmInvest Research - 27 Sept 2018