- The Federal Reserve in the US is about to inject uncertainty back into financial markets after spending years assuring that interest rates would remain low.

- The Federal Open Market Committee (FOMC) reaffirmed its view yesterday that the current 0 to 0.25% target range for the federal funds rate remains appropriate.

- The FOMC judges that an increase in the target range for the federal funds rate remains unlikely at the policy meeting in April, which is consistent with previous monetary policy statements.

- However, the Committee anticipates that it will be appropriate to raise the benchmark interest rate when there is further improvement in the labour market coupled with the Fed’s confidence that medium-term inflation rate will increase to 2%.

- Note that the unemployment rate in the US slipped to 5.5% in February, while the core inflation rate stood at 1.6% YoY in January.

- The US dollar index had advanced by 5.6% YTD to close at 1,194.89 points yesterday. Elsewhere, the Ringgit closed at RM3.7075 per USD yesterday (or a depreciation of 6.0% YTD from the close of RM3.497 per USD as at end-2014).

- That said, the Malaysian economy is backed by a comfortable reserves level. As at end-February 2015, reserves at BNM stood at USD110.5bil (January: USD110.6bil).

- The reserves position is sufficient to finance 7.9 months of retained imports and is 1.1 times the short-term external debt.

- In terms of international standard, the minimum threshold for reserves as per retained imports is 3 months and 1.0 time as per the short-term external debt.

- As a recap, the reserves at BNM were based on the newly defined short-term external debt since May 2014. As at end- May 2014, the overall reserves were 1.3 times the short-term external debt.

- When redefined, Malaysia’s external debt includes all liabilities that require payment at some point in the future, and are owed to non-residents by residents irrespective of the currency denomination of the debt.

- As such, non-resident holdings of Ringgit-denominated debt securities and other debt-related non-resident financial flows are included as part of Malaysia’s external debt (refer to Chart 2).

- Prior to May 2014, external debt consisted of foreign currency-denominated debt, namely loans, and bonds and notes issued offshore. Note that the ratio of foreign reserves to short-term external debt was 3.3 times as at end-April 2014.

- Back in April 2011, reserves at BNM were 5.0 times the short-term external debt. Meanwhile, overall reserves had accounted for 10.0 months of retained imports in October 2011.

Source: AmeSecurities