News

• The FOMC increased its target range for the federal fund rate by 25bps to 0.75-1.00%. The Fed stated that the decision did not represent a reassessment of the economic outlook or of the appropriate pace of monetary policy.

• While the FOMC was more confident on business fixed investment, it maintained its outlook on consumer spending and labour market. On inflation, FOMC continued to acknowledge the increase in headline PCE was driven largely by higher energy prices. However, excluding energy and food prices, it has been little changed.

• Economic growth projections were maintained in 2017 at 2.1% but tweaked slightly higher in 2018 by 0.1ppt to maintain steady growth of 2.1% (Dec: +2.1% and 2.0% respectively).

• Projection of unemployment remained unchanged (2017: 4.5%; 2018: 4.5%)

• Forecast of headline inflation was steady at 1.9% and 2.0% in 2017 and 2018 respectively. Meanwhile, forecasts of core PCE deflator was raised slightly to 1.9% for 2017 (Dec: 1.8%), but remained at 2.0% in 2018 (Dec: 2.0%).

• FOMC members’ projection of fed fund rate was maintained at 1.4% for 2017, implying 2 more rate hikes this year. In 2018, the projection is at 2.1% and 3.0% in 2019, in line with estimated long-run rate. This projection is relatively unchanged from December’s forecast.

Comments

• The FOMC statement was broadly neutral with normalization bias, pointing to an improving economy accompanied by gradual pace of rate hike.

• We raise our forecast for the Fed to hike interest rate twice in remainder of 2017 (in line with FOMC guidance): - While Trump policy optimism is fading, US growth prospects may eventually get a boost in 2018 from tax cut and infrastructure spending. Fed may have to stay ahead of the expected growth path in 2018 despite maintaining a steady GDP forecast for 2018. - While headline inflation has increased, it mainly reflected increase in energy prices. There has been renewed uncertainty in global oil market as return of supply has outpaced production cut amid steady demand.

• The less hawkish tone of the policy statement has led to a decline in US$. Barring an adverse trade policy by Trump, the global economy is expected to benefit from a more robust US growth, leading a more synchronized global expansion and monetary policy cycle. This would naturally curb the strength in US$.

• We maintain our MYR forecast at RM4.30-4.55/US$ in 2017. While bond outflows may continue given an improving global economy (monetary policy tightening), ringgit support emanates mainly from higher commodity surplus (firmer prices and higher volume) as well as BNM’s foreign exchange measures which provide a buffer to counter the bond outflows.

Source: Hong Leong Investment Bank Research - 16 Mar 2017