News

• As widely anticipated, the FOMC increased its target range for the federal funds rate by 25 bps to 1.25-1.50%. The FOMC stuck to its projection for three further increases in 2018.

• The FOMC said that economic activity has been rising at a solid rate. Job gains have been solid and unemployment rate declined further. Similar to the previous statement in November, the FOMC stated that household spending has been expanding at a moderate rate and growth in business investment has picked up.

• On inflation, the Committee stated that headline prices and inflation excluding food and energy have declined this year and undershot 2% target. Nevertheless, market-based inflation measures remain low while survey-based inflation expectations are little unchanged.

• Economic growth projection was at 2.5% for 2017, slightly higher than 2.4% previously. For 2018, growth was also upgraded to 2.5% (previous: 2.1%).

• Projection of unemployment was 4.1% in 2017, an improvement from the previous estimate of 4.3%. In 2018, unemployment is anticipated to dip further to 3.9% (previous: 4.1%).

• Forecast for 2017 PCE deflator was nudged slightly higher to 1.7% (previous: 1.6%), but remained unchanged at 1.9% in 2018. Core PCE deflator projections remained steady (2017: 1.5%; 2019: 1.9%).

• FOMC members’ projection of fed fund rate was at 2.1% for 2018, reinforcing the Committee’s decision to hike three times in 2018.

Comments

• The FOMC decision was in line with expectations. This is the last FOMC press conference to be presided by Janet Yellen. Jerome H. Powell, the current governor in the FOMC will head the Fed after Yellen’s term ends in February 2018. He has presented himself as a pragmatic moderate who would continue with the Fed’s current approach of gradual removal of monetary policy accommodation. In his statements throughout the year, he has said he sees little risk of inflation spurring faster rate hikes due to subdued wage growth. Latest labour market data reinforced this view as wage growth remained tepid (2.5%) despite the strong gains in employment (228k). Currently, the Fed expects to increase the fed fund rate three times in 2018, similar to the pace seen in 2017.

• Despite the rate hike, the Fed statement sounded dovish as it maintained its dot plot projections despite th slight upgrade in economic growth. Conseqeuntly, the US$ weakened. In 2018, we continue to expect that room for further US$ appreciation will be capped by a more synchronized global growth. We keep our ringgit forecast at RM4.10 at end-2017 and RM4.00-4.20/US$ for 2018. Our view of a mild appreciation bias for ringgit is mainly supported by firmer oil prices, high export proceeds conversion and normalised foreign holdings in Malaysian bond and equity markets.

Source: Hong Leong Investment Bank Research - 14 Dec 2017