As anticipated, the FOMC maintained its target range for the federal funds rate at 2.00-2.25%. The FOMC noted that household spending remained strong while business investment moderated from the rapid pace earlier in the year. 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%.

DATA HIGHLIGHTS

As anticipated, the FOMC maintained the target range for the federal funds rate at 2.00-2.25%.

Overall, 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 has declined, after stating in remained low in the previous statement. The Committee said that household spending continued to grow strongly. This is consistent with the latest 3Q 2018 GDP reading whereby consumer spending, which accounts for almost 70% of GDP grew by 4%. q-o-q SA basis. This was the strongest pace recorded since the fourth quarter of 2014. Meanwhile, business investment has moderated from its rapid pace earlier this year. (+0.8% q-o-q SA basis; 2Q18: +8.8% q-o-q basis). This shows FOMC is less favourable on private investment compared to the previous statement when business investment has 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 3.1% in 2018 and 2.5% in 2019, signalling moderation in GDP in 2019 but still higher than longer-run rate of +1.8%. Unemployment forecast in 2018 was retained at 3.7% 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 expected to 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 on 18th – 19th December 2018 FOMC meeting. 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 remained focused on the underlying economy which continued to be supported by the strong labour market in the context of price stability. There remained no mention on the negative impact of trade tension in the draft with the FOMC stating the risk to outlook appear roughly balanced. 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 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% following more moderate GDP performance and temporary policy-induced low inflation. 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.

Source: Hong Leong Investment Bank Research - 9 Nov 2018