News 

• As widely anticipated, the FOMC increased its target range for the federal funds rate by 25 bps to 1.50-1.75%. The FOMC stuck to its projection for three policy rate increases overall in 2018 but hiked its rate forecast through 2020.

• The FOMC said that economic activity has been rising at a moderate rate. Job gains have been strong in recent months, and the unemployment rate has stayed low. The Committee said that household spending and business investment has moderated from the strong fourth quarter. Nevertheless, the economic outlook has strengthened in recent months.

• On inflation, the Committee continued to note that it has continued to run below 2 percent while market based measures of inflation compensation have increased in recent months but remain low. On the horizon, CPI is anticipated to move up in coming months.

• 2018 and 2019 economic growth projection was raised by 0.2 ppts and 0.3 ppts respectively to 2.7% and 2.4% (previous projection: 2.5% and 2.1% repectively).

• Unemployment forecast was also slightly lower in 2018 at 3.8% (previous: 3.9%) and 3.6% in 2019 and 2020 (previous: 3.9% and 4.0% respectively).

• Forecast for 2018 PCE deflator was unchanged at 1.9% in 2018 and 2.0% in 2019 but raised slightly to 2.1% in 2021. Core PCE deflator was also left unchanged in 2018 at 1.9% but expected to rise slightly higher to 2.1% in 2019 and 2020.

• FOMC members’ projection of fed fund rate was at 2.1% for 2018, reinforcing the Committee’s decision to two more rate hikes in 2018. The Committee expects to increase the fed fund rate by 3 times in 2019 (previous: 2 times).

Comments

• The FOMC decision was in line with expectations. This is the first FOMC press conference to be presided by Jerome H. Powell who has presented himself as a pragmatic moderate, continuing with the Fed’s approach of gradual removal of monetary policy accommodation. In his first press conference, Jerome H. Powell signaled that while the economic activity is on stronger footing and expected to get a boost from President Trump’s tax measures, the ultimate impact to inflation is still uncertain. Hence, despite the upgrade in GDP and labour market outlook, the FOMC maintained its projection for total of 3 interest rate increase in 2018. Consequently, the US$ declined.

• Closer to home, we continue to anticipate the ringgit to have an appreciation bias in 2018 compared to 2017. The faster increase in appreciation at the start of the year has led us to revise our exchange rate projection to USD/MYR3.85-4.00 from USD/MYR4.00-4.20. This is premised on the assumption that GDP and CPI is anticipated to grow at a more moderate pace in 2018 compared to 2017 and BNM to maintain the OPR at 3.25% for the rest of 2018.

Source: Hong Leong Investment Bank Research - 22 Mar 2018