As anticipated, the FOMC maintained its target range for the federal funds rate at 2.25%-2.50%. However, the FOMC was more dovish as it now projects interest rate to remain steady at current level in 2019 with one more rate hike in 2020. On the balance sheet, the Committee announced its plan to reduce the pace of tightening on its balance sheet plan starting from May 2019 and to maintain the size from October 2019 for a period of time. The Fed’s dovish stance is expected to weaken the dollar as investors search for yield in emerging market. In line with this, we revise our average ringgit projection to USD/MYR4.05-4.15 (previous: USD/MYR 4.10-4.30; 2018: USD/MYR: 4.04).

DATA HIGHLIGHTS

As anticipated, the FOMC maintained the target range for the federal funds rate at 2.25-2.50% but scaled back the pace of tightening it expects for the economy. The Committee does not anticipate further tightening in 2019 while it projects one more rate hike in 2020. On the balance sheet, starting in May 2019 until September 2019, the maximum amount of Treasury securities that the Fed will roll off will be halved to USD15bn (current: USD30bn) while the agency and mortgage backed securities (MBS) will continue to roll of at maximum pace of USD20bn a month. From October 2019, the overall size of the balance sheet will remain unchanged (slightly above USD3.5trn) for an unspecified amount of time. The Fed will allow the agency and mortgage backed securities to continue its roll off at a maximum amount of USD20bn (current: USD20bn), to be replaced with Treasury securities.

The Fed’s dovish stance partly resulted from a more moderate view of the US economy. The committee said that economic activity has slowed from its solid rate in fourth quarter of 2018. Recent indicators point to slower growth of household spending, and business fixed investment in the first quarter. On inflation, the Committee said it has declined due to lower global oil prices while inflation excluding food and energy remained near 2 percent. Market based measures of inflation compensation remained low while long-term inflation expectations are little changed.

In line with weaker assessment of the economy, the FOMC downgraded 2019 GDP to 2.1% (previous: 2.3%), as well as 2020 GDP (+1.9% YoY; previous: +2.0% YoY). Unemployment forecast was nudged up in 2019 and 2020 to 3.7% and 3.8% respectively (previous: 3.5% and 3.6% respectively). Nevertheless, it still remains below the long-run rate of 4.3% indicating continued labour market strength overall. PCE inflation forecast for 2019 and 2020 was lowered slightly to 1.8% YoY and 2.0% YoY (1.9% YoY and +2.1% YoY). Core PCE was maintained at 2.0% YoY in 2019 and 2020. For 2019, FOMC members’ projection of fed fund rate has been reduced to 2.4% (previous: 2.9%), indicating the FOMC is projecting no change in the policy rate. In 2020, the Committee maintained its projection to increase the policy rate by 1 time. On the estimated neutral rate, the FOMC maintained the long-run rate at 2.8%.

HLIB’s VIEW

Since the start of 2019, the global economy has grown at a more moderate pace. Key risks remain unresolved. Negotiations on US-China trade as well as Brexit have been prolonged with no clear resolution in sight. This will lead to continued uncertainty with negative impact on spending and investment decisions. Along with the estimated longer-run rate at 2.8%, which is slightly above the current policy rate, we project the FOMC to remain on hold for 2019. In the short-term, the Fed’s dovishness is expected to weaken the dollar as investors search for yield in emerging market, including Malaysia. In line with this, we revise our projection of 2019 ringgit average to trade at USD/MYR 4.05-4.15 for 2019 (previous: USD/MYR 4.10-4.30;2018: USD/MYR: 4.04).

Source: Hong Leong Investment Bank Research - 21 Mar 2019