Fed Chairman Jerome Powell told US lawmakers on Tuesday there is “no rush to make a judgment” about further changes to interest rates. If anything, we feel that Powell’s comments somewhat hardened the policy shift last month in which it indicated it would pause a three-year cycle of rate hikes, which had been projected to run well into 2020, until the inflation or growth dynamics change. We are now of the view that the Fed is unlikely to raise rates in 2019. The probability for one rate hike is below the 5% level. The Fed’s benchmark overnight lending rate currently is within a range of 2.25%–2.50%. We hope the Fed Chair continues the rhetoric of patience set out in the FOMC’s meeting minutes last week and not walk back that dovish tone as fears are that the Fed Chair could have gone too far back in January. On the local scene, with a weak inflationary environment added with a stronger ringgit outlook for the year, it opens the door wider for Bank Negara to reduce the policy rate by 25bps from the current level. Such a move would be more to support the domestic growth by ensuring sustainable private spending.

• Fed Chairman Jerome Powell told US lawmakers on Tuesday there is “no rush to make a judgment” about further changes to interest rates. Powell elaborated on the “conflicting signals” it had to interpret in recent weeks, including disappointing data on retail sales which contrasted the steady hiring, wage growth, and ongoing low unemployment.

• Recall, the Fed Chair in October cited the central bank was “a long way” from a neutral, and in December he commented that the process of reducing the balance sheet was on “autopilot”. These comments went down negatively with the markets throughout the final month of 2018 until the Fed Chair took a softer tone and suggested the Fed will be driven by a more data-dependent path going forward.

• If anything, we feel the Fed Chair’s comments somewhat hardened the policy shift last month in which it indicated it would pause a three-year cycle of rate hikes, which had been projected to run well into 2020, until the inflation or growth dynamics change.

• There was also little said by the Fed about evolving the plan to maintain a balance sheet of perhaps US$3.5 trillion, which would be lower than the current US$4 trillion. Still, it is huge by historical standards.

• Looking at the bond market, it is signalling the economy is expected to slow as it moves forward and inflation to remain very low. We are now of the view that the Fed is unlikely to raise rates in 2019. The probability for one rate hike is below the 5% level. The Fed’s benchmark overnight lending rate currently is within a range of 2.25%–2.50%.

• We hope the Fed Chair continues the rhetoric of patience set out in the FOMC’s meeting minutes last week and not walk back that dovish tone as fears are that the Fed Chair could have gone too far back in January.

• On the local scene, with a weak inflationary environment added with a stronger ringgit outlook for the year, it opens the door wider for Bank Negara to reduce the policy rate by 25bps from the current level. Such a move would be more to support the domestic growth by ensuring sustainable private spending.

Source: AmInvest Research - 27 Feb 2019