News

• The FOMC maintained its current 0.25-0.50% target range for the federal funds rate.

• While the assessment of the US economy remained upbeat with solid job gains and modest increase in inflation, the Fed preferred to wait for some further evidence of continued progress before raising rates.

• Compared to the previous statement, the FOMC viewed household spending to have expanded more moderately while business fixed investment remained soft.

• On inflation, the FOMC acknowledged that prices have increased somewhat with some measures of inflation compensation moving up. However, it cautioned that it still remained below the 2% longer-run objective signaling still weak underlying inflation. Going forward, the Committee omitted the previous language of “inflation would probably remain low in the near term” but expected inflation to rise as transitory effects wanes while labour market strengthens further.

• There were two dissenters (2/10) in this meeting compared to three in September FOMC meeting.

• Projection of unemployment rate remains at 4.8% for 2016 matching long-run estimate.

• Forecast headline PCE deflator is 1.3% for 2016 and 1.9% in 2017.

• FOMC members’ projection of fed fund rate is 0.6% for 2016 and 1.1% in 2017 (current: 0.25-0.50%).

Comments

• The FOMC continued to sound relatively upbeat on the progress of the economy while also noting that downside risks remains balanced. However, the FOMC decided to leave rates unchanged at this meeting, leaving investors to anticipate the FOMC will raise rates in December 2016, barring no domestic (e.g. US Presidential Election) and external shocks (e.g. OPEC meeting and China growth).

• While the Fed has avoided giving an explicit signal on an imminent rate hike, financial markets have already priced in 78% probability of rate hike in December. This figure has consistently increased since July when the Fed signaled its intention to raise rates.

• We maintain our forecast for the Fed to increase rates by 25bps in December 2016. As unemployment rate is close to the longer-run unemployment rate, further job gains in the labour market is expected to generate some demand led inflation. In addition, we expect the impact of earlier energy price declines to fade further, leading headline PCE to modestly increase towards Fed’s 2% goal.

• As December rate hike is now widely expected by the market, we opine that US$ may not strengthen beyond its recent peak recorded during its liftoff in Dec 2015. However, the continued accommodative monetary policies by other major central banks amid still-high downside risks would still make the US$ attractive from growth / rate differential angle. We keep our MYR range forecast at RM4.00-4.20/US$ towards the year-end and in 2017.

Source: Hong Leong Investment Bank Research - 3 Nov 2016