As anticipated, the FOMC maintained its target range for the federal funds rate at 2.25%-2.50%. However, in light of higher uncertainty and muted inflation pressures, the FOMC says it will monitor incoming data and act as appropriate to sustain the expansion with a strong labour market and inflation near its symmetric 2% objective. Following this development, we expect FOMC to reduce policy rate as soon as 30-31 July 2019 FOMC meeting.

DATA HIGHLIGHTS

As anticipated, the FOMC maintained the target range for the federal funds rate at 2.25-2.50%. Nevertheless, the statement was dovish as the committee said it will closely monitor incoming information and will act as appropriate to sustain the expansion, with a strong labour market and inflation near its symmetric goal.

Overall, the FOMC was cautious on the economy. While it maintained its assessment on job market and consumption, it was less sanguine on investment and inflation prospects. The Committee said job gains have been strong, and the unemployment rate remained low. Although household spending appears to have picked up from earlier in the year, business fixed investment continues to be soft. On inflation, the Committee noted that overall inflation and inflation for items other than food and energy are running below 2%. Market based measures of inflation expectations have also declined while survey-based measures are little changed. While the Committee continues to view sustained expansion of economic activity, strong labour market and inflation near the 2% objective as the most likely outcomes, uncertainties about this outlook has increased.

2019 GDP was maintained at 2.1% (previous: 2.1%) and anticipated to ease to 2.0% (previous: 1.9%) in 2021. The longer-run GDP remained at +1.9%. Unemployment forecast in 2019 was reduced slightly to 3.6% (previous: 3.7%) and expected to increase to 3.7% (previous: 3.8%) in 2020. Forecast for 2019 and 2020 PCE deflator was lowered slightly to 1.5% YoY (previous: +1.8% YoY) and 1.9%YoY (previous: 2.0% YoY). In line with the slight downgrade of PCE, core PCE deflator forecast was also pared down to 1.8% YoY (previous: +2.0% YoY) and 1.9% YoY (previous: 2.0% YoY) for 2019 and 2020 respectively. For 2019, FOMC members’ projection of median fed fund rate was maintained at 2.4%. However, FOMC members’ median fed fund projection was lowered to 2.1% (previous: 2.6%) in 2020 before moving up to 2.4% (previous: 2.6%) in 2021. The estimated longer-run rate was also reduced to 2.5% (previous: 2.8%).

HLIB’s VIEW

Despite the pressure from US President Trump, central bank officials on the FOMC voted 9-1 to keep the policy rate unchanged at 2.25-2.50% in this meeting. Nevertheless, the cautious tone on economic activity, downgrade in inflation projection as well as the acknowledgement of an increasingly uncertain outlook has also led the Committee to drop the ‘patient’ stance in the FOMC statement. While the Fed did not specify when it would reduce rates, eight of the seventeen members are forecasting at least one rate cut by the end of 2019, a notable change from previous projections when none anticipated a rate cut this year. Consequently, we expect FOMC to reduce policy rate as soon as July 2019 FOMC meeting if there is no significant improvement in data. In Malaysia, BNM signalled that the recent rate cut was one-off and explained it was to maintain monetary policy accommodativeness as it observed some signs of financial tightening. While we maintain our expectation for BNM to sustain the OPR for 2019, a worsening global environment may also tip BNM to reduce the OPR to support the economy.

Source: Hong Leong Investment Bank Research - 20 Jun 2019