As anticipated, the FOMC maintained its target range for the federal funds rate at 2.25%-2.50%. The FOMC reiterated its intent to remain patient as lower-than expected inflation reading is anticipated to be transitory while downside risks have moderated somewhat. The relatively upbeat statement is anticipated to dampen financial market’s hopes for an increasingly dovish Fed which may lead to stronger dollar in short-run. We maintain our USD/MYR projection at USD/MYR 4.05-4.15 in 2019.

DATA HIGHLIGHTS

As anticipated, the FOMC maintained the target range for the federal funds rate at 2.25-2.50%. Overall, the FOMC was positive on the economy as it said that economic activity rose at a solid rate. Job gains have been solid, and the unemployment rate remained low. The Committee said that household spending and business fixed investment slowed in the first quarter. Nevertheless, the FOMC expects these two components to bounce back, supporting expectation of a healthy GDP growth for the rest of the year. On inflation, the Committee noted that overall inflation and inflation for items other than food and energy have declined and are running below 2%. The FOMC suspects that some transitory factors may be at work. Thus, the baseline view remains that inflation will return to 2% over time, supported by strong job market and continued growth.

During the press conference, FOMC chair Powell stated that while downside risks remain, particularly from external developments (weak Europe and China growth, possibility of disruptive Brexit, uncertainty in trade negotiations), risks have moderated somewhat due to shift towards a more accommodative monetary policy, fiscal policy, some improvement in economic data in Europe and China and further progress in US China trade talks. Hence, the Committee views these developments along with the outlook for continued growth, a strong job market and muted inflation pressures as consistent with continued patience in adjusting monetary policy.

The FOMC also made a technical adjustment for implementing monetary policy, by adjusting the interest on excess reserves (2.35% prior: 2.40%). FOMC emphasised that the change does not reflect any shift in the intended monetary policy stance.

The FOMC maintained the 2019 GDP at 2.1%, as well as 2020 GDP +1.9% YoY. Unemployment forecast was maintained in 2019 and 2020 at 3.7% and 3.8% 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 kept at 1.8% YoY and 2.0% YoY. Core PCE was maintained at 2.0% YoY in 2019 and 2020. For 2019, FOMC members’ projection of fed fund rate was retained at 2.4%, 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

The FOMC decision was in line with our expectations. The FOMC maintained its forecast for monetary policy to remain steady in the foreseeable future as they expect inflation to increase and consumption and business investment to bounce back . However, this may disappoint financial markets following US President Trump’s insistence on lowering rate and market expectations of lower policy rate sometime in the future. Consequently, dollar is anticipated to be stronger in the short-run which may lead to weaker ringgit. We maintain our expectation for ringgit to average slightly weaker in 2019 (USD/MYR 4.05-4.15; 2018: USD/MYR: 4.04).

Source: Hong Leong Investment Bank Research - 2 May 2019