As anticipated, the FOMC maintained its target range for the Federal funds rate at 1.75-2.00%. Despite the threat of rising trade tension, the FOMC was buoyant in its assessment on the economic outlook and maintained its view that risk to the economic outlook appear roughly balanced. Hence, we opine that the FOMC will stay the course to raise the policy rate two more times this year (September and December 2018). In Malaysia, despite the FOMC’s continued focus in raising the interest rate, we expect BNM to maintain the OPR at 3.25% for the rest of 2018 as GDP and inflation is expected to be more moderate this year compared to 2017 and financial stability remains intact, as indicated by positive real interest rate.

DATA HIGHLIGHTS

As anticipated, the FOMC maintained its target range for the Federal funds rate at 1.75-2.00%.

The FOMC was more buoyant on the economy as it said that economic activity has been rising at a strong rate. Job gains have been strong, and the unemployment rate remained low. The Committee said that household spending and business investment have grown strongly.

On inflation, the Committee noted that overall inflation and inflation for items other than food and energy remained near 2%. Indicators of long-term inflation expectations are little changed, on balance. The Committee noted that risks to the economic outlook appear roughly balanced.

2018 GDP was maintained at 2.8% in 2018 and 2.4% in 2019. Unemployment forecast in 2018 remained at 3.6% and 3.5% in 2019. Forecast for 2018 PCE deflator was slightly higher than long-run rate at 2.1% in 2018 and 2019. Core PCE deflator was forecasted at 2.0% in 2018 and 2.1% in 2019. FOMC members’ projection of Fed fund rate is at 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. Despite the threat of rising trade tension between US and China, there was no mention of its impact to growth in FOMC statement. Instead, the FOMC focused on the underlying economy which remained strong, indicating another rate hike is likely the upcoming meeting in September. US economy grew by 4.1% annualised rate in 2Q 2018, driven by increase in private consumption, government spending and net exports. The strong increase in private consumption was supported by solid labour market and government tax cuts. Meanwhile, June headline inflation and core inflation grew by 2.2% YoY and 1.9% YoY respectively, close to FOMC’s long-run target of 2.0% YoY. Consistent with FOMC’s mandate of maintaining maximum employment and stable prices, we opine that the FOMC will stay the course to raise the FOMC rate at a gradual pace. Hence, we maintain our forecast for FOMC to raise two more times this year (September and December 2018).

Closer to home, despite the FOMC’s continued focus in raising the interest rate, we expect BNM to maintain the OPR rate at 3.25% for the rest of 2018 as GDP and inflation is expected to be more moderate this year compared to 2017 and financial stability remains intact, as indicated by positive real interest rate.

Source: Hong Leong Investment Bank Research - 2 Aug 2018