News

• The Fed maintained its current 0-0.25% target range for the federal funds rate.
• In its press statement, the Fed dropped the word “patient” but said that it is ready to raise rates when there is further improvement in the labour market and is confident that inflation will move back to its 2% objective.
• Compared to the previous statement, economic assessments were broadly unchanged. However, the Fed also highlighted that export growth has recently weakened.
• The Fed lowered the end-2015 median for the federal funds rate to 0.625% (previously: 1.125%).
• The Fed also lowered its 2015 GDP forecast to 2.3-2.7% from 2.6-3.0% made previously. Core inflation forecast was also cut to 1.3-1.4% (previously: 1.5-1.8%). Meanwhile, unemployment rate forecast was improved to 5.0-5.2% (previously: 5.2-5.3%).
• Of the 17 members, 15 said 2015 is the right year to being tightening policy.

Comments

• The Fed’s statement was more dovish compared to our and market expectations.
• On economic growth, recent data already pointed to a slower-than-expected 1Q growth, affected partly by the severe winter. The Fed highlighted that export growth has weakened, probably stressed by the strength of the US$ arising from the launch of ECB QE.
• Based on the latest guidance, we now expect the first rate hike by the Fed to happen in October (previously July). This was solely derived from the median forecast of fed fund rate of 0.625% by the FOMC members.
• Consequently, we expect the strength of US$ to temporarily cool off as the Fed delays its rate hike. However, the deep divergence in monetary policy in key economies (extorted by ECB QE & BOJ expansion in monetary base) will likely to maintain the strength of US$ vis-à-vis other currencies, including MYR.
• While US$-denominated commodity prices (i.e. crude oil) will be relieved from strong US$, we expect fundamentals of demand-supply to prevail in their price direction. We maintain our Brent oil assumption at US$55/bbl for 2015.
• We maintain our GDP forecast of the US economy at 3.0% for 2015 (2014: +2.4%), with an expectation of low energy prices feeding into stronger consumer spending.
• We maintain MYR range forecast at RM3.45-3.70/US$ for 2015, with a mid-point forecast of RM3.50/US$.
• We maintain Malaysia’s GDP growth forecast at 5.0% on robust oil output and resilient consumer spending.
• We reiterate our view that BNM will continue to leave its OPR unchanged at 3.25% throughout 2015.

Source: Hong Leong Investment Bank Research - 19 Mar 2015