As widely anticipated, the FOMC maintained its target range for the federal funds rate at 1.50-1.75%. The Committee acknowledged that inflation has moved close to its target of 2% and is expected to run near the symmetric target over the medium-term. Hence, against the background of low unemployment rate and faster inflation reading, we increase our forecast for 3 more rate hikes (previous: 2 more rate hikes) in 2018. Nevertheless, despite the faster inflation reading, the FOMC reiterated their gradual stance of monetary policy normalisation.

DATA HIGHLIGHTS

As widely anticipated, the FOMC maintained its target range for the federal funds rate at 1.50-1.75%.

The FOMC said that economic activity has been rising at a moderate rate and employment has continued to strengthen. While the Committee acknowledged that household spending has moderated from strong fourth-quarter, business fixed investment continued to grow strongly.

On inflation, the Committee noted that overall inflation and inflation excluding food and energy have moved close to 2% target and is expected to run near to the Committee’s symmetric 2% target over the medium term. Of significance, it has also dropped the line that FOMC will continue to monitor inflation development closely. Nevertheless, the Committee maintains its expectation of a gradual adjustment in monetary policy normalisation path. This is also backed by their assessment of low market-based measures of inflation compensation and long-term inflation expectations.

2018 and 2019 economic growth projection was maintained at 2.7% and 2.4% respectively.

Unemployment forecast was steady at 3.8% in 2018 and 3.6% in 2019.

2018 PCE deflator was unchanged at 1.9% in 2018 and 2.0% in 2019. Core PCE deflator was also maintained at 1.9% and 2.1% in 2018 and 2019 respectively.

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

HLIB’s VIEW

Federal Reserve officials left the interest rates unchanged. However, the Committee acknowledged that inflation is close to its target of 2% after falling short for the past 6 years (March personal consumption expenditure: 2%; core personal consumption expenditure: 1.9%). As unemployment rate remains low and inflation close to the Fed’s target, we increase our expectation for 3 more interest rate hike this year (previous: 2 more interest rate hike). Nevertheless, despite the faster inflation figures, we continue to expect the Fed to maintain the gradual path of monetary policy normalisation as the Fed sees stable long-term inflation expectations and higher downside risks to growth (trade dispute between China and US, flattening of yield curve). We maintain our exchange rate projection of USD/MYR 3.85-4.00, premised on the assumption that GDP and CPI is anticipated to grow at a more moderate pace in 2018 and BNM to maintain the OPR at 3.25% for the rest of 2018.

Source: Hong Leong Investment Bank Research - 3 May 2018