News

• As widely anticipated, the FOMC maintained its target range for the federal funds rate at 1.25-1.50%.

• The FOMC said that economic activity has been rising at a solid rate and unemployment rate stayed low. The FOMC said employment, household spending and business fixed investment have been solid, indicating higher confidence in growth since the last meeting in December 2017.

• On inflation, the Committee stated that headline prices and inflation excluding food and energy will move up this year and stabilise around 2% target, after running below target in 2017. The FOMC also stated that market-based measures of inflation expectations have increased in recent months, but remain low. Meanwhile, survey-bawed measures of long-term inflation expectations are little changed.

• Economic growth projection remain at 2.5% in 2018. Final quarter of 2017 GDP was slightly lower at 2.6% annual rate (3Q: 3.2%), more modest than consensus expectations of 3.0% due to higher imports. Nevertheless, for the whole year, the US economy grew by 2.3%, a pick up from 1.5% logged in 2016 GDP.

• Projection of unemployment remain at 3.9% in 2018, as stronger economic activity and labour market are anticipated to spillover to a lower unemployment rate. Throughout 2017, the unemployment rate trended lower from 4.8% in January 2017 to end the year at 4.1% in December 2017.

• Forecast for 2018 PCE deflator remained unchanged at 1.9% (2017: 1.7%). Core PCE deflator projections remained steady at 1.9% as well (2017: 1.5%).

• 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. The statement was subtle in its language but sounded more confident of the recovery in the US economy and inflation prospects. Nevertheless, it still maintained its stance for a further gradual monetary policy normalisation.

• This is the last FOMC meeting to be presided by Janet Yellen. Jerome H. Powell, the current governor in the FOMC will head the Fed in February 2018. Thus far, he is seen as a pragmatic moderate who would continue with the Fed’s current approach of gradual removal of monetary policy accommodation.

• However, following an improvement in the US economic and inflation readings, there is an upside risk of the FOMC hiking faster than its forecasts of three rate hikes in 2018 should wage growth pick up amid easy financial conditions.

• Closer to home, we expect BNM to maintain its OPR for the rest of 2018. Should global growth surprise on the upside and lead to stronger domestic economic activity and higher inflation, we see a probability of BNM raising the interest rate by another 25bps in 2H18.

Source: Hong Leong Investment Bank Research - 2 Feb 2018