As anticipated, the FOMC increased its target range for the federal funds rate by 25bps to 2.25%-2.50% and reduced the interest rate hike projection to 2x instead of 3x for 2019. As monetary policy normalisation continues in 2019, we expect global liquidity conditions to tighten which would lead to lower risk appetite towards emerging market economies, including Malaysia. We maintain our USD/MYR projection at 4.30 in 2019.

DATA HIGHLIGHTS

As anticipated, the FOMC increased the target range for the federal funds rate to 2.25-2.50% (previous: 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 remained low. The Committee said that household spending continued to grow strongly. Meanwhile, business investment has moderated from its rapid pace earlier this year. 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. Nonetheless, while they maintained the positive assessment of the overall economy and judged that risks to the economic outlook are roughly balanced, the FOMC also noted that they will continue to monitor global economic and financial developments and assess their implications for the economic outlook.

2018 GDP was downgraded slightly to 3.0% (previous: 3.1%), as well as 2019 GDP (+2.3% YoY; previous: +2.5% YoY), but still higher than longer-run rate of +1.9%. 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 lowered slightly to 1.9% YoY (previous: +2.1% YoY) and expected to remain steady at +1.9% YoY in 2019 (previous: +2.0% YoY). In line with the slight downgrade of PCE, core PCE deflator forecast was also pared down to 1.9% YoY (previous: +2.0% YoY) but expected to trend slightly higher to +2.0% YoY (previous: +2.1% YoY). This may reflect FOMC members’ belief that core inflation will be driven by higher wage growth arising from strong labour market. For 2019, FOMC members’ projection of fed fund rate has been reduced to 2.9% (previous: 3.1%), indicating the FOMC is expected to raise the fed fund rate by 2 times in 2019 instead of 3 times as indicated previously. In 2020, the Committee maintained its projection to increase the policy rate by 1 time. On the estimated neutral rate, the FOMC has also reduced the long-run rate by 25 bps to 2.8% (previous: 3.1%).

HLIB’s VIEW

The FOMC decision was in line with our expectations. Despite the lower equity market and pressure from US President Trump to maintain the policy rate, the FOMC remained focused on the underlying economy which continued to be supported by the strong labour market amid lower but still near FOMC’s target of PCE inflation. Nevertheless, the Committee noted that they will closely monitor global developments. In line with the FOMC’s slightly slower growth and inflation projection in 2019, the Fed gradually reduced the projection for interest rate hikes to 2x instead of 3x in 2019. In 2019, we expect global liquidity conditions to be tighter as the FOMC maintains the course to reduce the size of the balance sheet by USD50bn a month while the ECB stops its government bond purchases. This is anticipated to lead to lower risk appetite towards emerging market economies, including Malaysia. We maintain our USD/MYR forecast of 4.10-4.30 2019.

Source: Hong Leong Investment Bank Research - 20 Dec 2018