News

• As widely expected, the FOMC maintained the fed fund rate at 1.0-1.25% target range but said it plans to start its balance sheet normalisation relatively soon in the statement.

• The FOMC said that economic activity has been rising moderately so far this year. The committee indicated that job gains have been solid. The Committee noted that inflation has continued to decline. It omitted the term ‘somewhat below’, signaling it has grown more cautious on the inflation outlook. Similar to the previous statement, inflation is expected to stabilize around the 2% objective over the medium term. The FOMC maintained its assessment on a balanced risk outlook but will keep a close look out on inflation developments.

• Economic growth projection was at 2.2% for 2017; long run: 1.8%.

• Projection of unemployment remained at 4.3%; long run: 4.6% (previous: 4.7%).

• Forecast of both headline and core PCE deflator for 2017 was at 1.6% and 1.7% respectively. Meanwhile, long-term projection for headline PCE was at 2.0%

• FOMC members’ projection of fed fund rate was unchanged at 1.4% and 2.1% for 2017 and 2018 respectively.

Comments

• The FOMC statement was broadly neutral. The expected rebound in economic activity in 2Q 2017 after a weak 1Q 2017 proved that the weakness was temporary, in line with FOMC previous assessment.

• The weaker-than-expected inflation print has thrown some caution to the Committee’s plan of raising the interest rate as the slowdown in inflation could be a reflection of structural trends. In particular, wage growth has not been as robust compared to previous recoveries despite the tightening labour market.

• From the recent statements by Fed officials, we opine that Fed has starting recognizing the downside risks of high asset prices. This can be seen from recent Fed Chair Janet Yellen’s remarks that asset prices were ‘somewhat rich if you use traditional metrics like price earnings ratios’. Fed Vice Chairman Stanley Fischer also warned against complacency when gauging the safety of global financial system.

• We maintain our forecast for the FOMC to start its balance sheet normalization after September 2017 FOMC meeting to fend off financial instability risks. We continue to opine that Fed will retain its policy rate at 1.0-1.25% till the end of the year. The balance sheet normalization process is expected to lead to more moderate capital flows to emerging market economies, including Malaysia. Nevertheless, we do not expect US Treasury bond yields to exhibit a significant jump as inflation outlook remains moderate. We maintain our view that upside for ringgit appreciation is limited and may move back to our expected range of RM4.30-4.40/US$ by end of 2017.

Source: Hong Leong Investment Bank Research - 27 Jul 2017