As anticipated, the FOMC increased its target range for the federal funds rate by 25bps to 2.00-2.25%. 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 rate in December 2018. In Malaysia, 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. GDP is anticipated to be more modest due primarily to supply side disruptions while inflation expected to be more moderate this year compared to 2017.

DATA HIGHLIGHTS

As anticipated, the FOMC raised its target range for the federal funds rate by 25bps to 2.00-2.25%.

The FOMC was positive 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 increased to 3.1% from 2.8% in 2018 and 2.5% from 2.4% in 2019, signalling better GDP prospects despite on-going trade tensions. Unemployment forecast in 2018 rose slightly to 3.7% from 3.6% and remained constant at 3.5% in 2019 indicating continued strong labour market. Forecast for 2018 PCE deflator was also maintained at 2.1% in 2018 but reduced slightly to 2.0% in 2019. Core PCE deflator forecast also remained constant at 2.0% in 2018 and 2.1% in 2019. This reflected FOMC members’ belief that inflation is not expected to surprise on the upside but remain near target. FOMC members’ projection of fed fund rate is at 2.4% for 2018, indicating one more interest rate increase for the year. For 2019, the Committee maintained its projection to raise the fed fund rate by three times, bringing the Fed fund rate to 3.1%, and lastly one rate hike in 2020 to reach 3.4%. This indicates that interest rate will be more restrictive than longer-run of 3.0% as soon as 2019.

HLIB’s VIEW

The FOMC decision was in line with our expectations. Despite the threat of ongoing trade tension between US and China, the FOMC focused on the underlying economy which continued to be supported by fiscal, low interest rates and strong labour market in the context of price stability. This was reflected in the upward forecast of real GDP in 2018 and 2019 and inflation projections near target level. On financial stability, the FOMC judged that overall vulnerabilities to be moderate while also stating that banks are on stronger footing. 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 the rate once more in 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%. While 2018 GDP is expected to grow at a slower pace than earlier anticipated, it is driven primarily by supply side disruptions while private sector spending continues to be relatively stable. Core inflation is also expected to be modest, indicating steady underlying demand.

Source: Hong Leong Investment Bank Research - 27 Sep 2018