As anticipated, the FOMC increased its target range for the federal funds rate by 25bps to 1.75-2.00% and raised its projection to two more rate hikes in 2018 (previous: one more). The FOMC was buoyant in its assessment on the economic outlook. Notwithstanding the positive outlook in the US economy, downside risks have increased (global trade uncertainties, slower-than estimated economic growth in other advanced economies). This has led to some depreciation pressure on emerging market economies, including Malaysia. Consequently, we revise our exchange rate projection to USD/MYR3.90-4.10 for the rest of the year (previous: USD/MYR3.85-4.00). This is premised on the assumption that Malaysia GDP and inflation will be more moderate in 2018 compared to 2017 and BNM to maintain the OPR at 3.25%.

DATA HIGHLIGHTS

As anticipated, the FOMC increased its target range for the federal funds rate by 25 bps to 1.75-2.00% and pointed to two more rate hikes.

The FOMC was more buoyant on the economy as it said that economic activity has been rising at a solid rate. Job gains have been strong in recent months, and the unemployment rate has declined. The Committee said that household spending had picked up while business investment and business investment has continued to grow. On inflation, the Committee noted that inflation has moved close to 2 percent.

2018 GDP was raised by 0.1 ppts to 2.8% (previous: 2.7%) and maintained at 2.4% in 2019. Unemployment forecast was also slightly lower in 2018 at 3.6% (previous: 3.8%) and 3.5% in 2019 and 2020 (previous: 3.6%). Forecast for 2018 PCE deflator was higher than the previous projection and long-run rate at 2.1% in 2018 and 2019 (previous: 1.9% and 2.0% respectively). Core PCE deflator was also higher in 2018 at 2.0% (previous: 1.9%) and retained at 2.1% in 2019 and 2020. FOMC members’ projection of fed fund rate was also increased to 2.4% for 2018, bringing the total increase to 4 interest rate increase this year. For 2019, the Committee maintained its projection to raise the fed fund rate by 3 times, bringing the Fed fund rate to 3.1%, which pushes past the long-run rate of 2.9% sooner than expected.

HLIB’s VIEW

The FOMC decision was in line with our expectations. The main takeaway from the press conference was the Fed’s positive outlook of the economy as indicated by upgrade in economic forecast. The FOMC decided to increase the interest rate projection by adding one more rate hike to 2018 while maintaining its projection of 3 rate hike in 2019. This effectively makes the policy rate slightly restrictive in 2019 (3.1%), as it moves above the longer-run rate of 2.9%. The decision to hold press conference after every FOMC meeting also signals to us that the FOMC wants to increase communication to explain their actions to the public, as the economy gets stronger. We maintain our expectation for FOMC to raise interest rate 2 more times this year.

Notwithstanding the positive economic outlook of the US economy, downside risk has increased. Uncertainty on global trade concerns and slower-than-expected increase in economic growth in other advanced economies have led to currency depreciation pressures on some EME, including Malaysia. Consequently, we revise our exchange rate projection to USD/MYR3.90-4.10 for the rest of the year (previous: USD/MYR3.85-4.00). This is premised on the assumption that Malaysia GDP and inflation will be more moderate in 2018 compared to 2017 and BNM to maintain the OPR at 3.25%.

Source: Hong Leong Investment Bank Research - 14 Jun 2018