As anticipated, the FOMC reduced its target range for the federal funds rate by 25 bps to 1.50%-1.75%. After reducing the interest rate for the third time this year, the FOMC signalled that its current rate cut cycle has come to an end as it removes the phrase that the Fed ‘will act as appropriate to sustain the expansion’. Nevertheless, at the start of the press conference, chairman Powell clarified that while the Committee thinks monetary policy is in a good place, they will continue to monitor the effects of policy actions along with information bearing on the outlook as they assess the appropriate path of the target range for the fed funds rate. The committee reiterated that policy is not on a preset course.

DATA HIGHLIGHTS

As anticipated, the FOMC reduced the target range for the federal funds rate by 25bps to 1.50-1.75%. The decision was supported by 8 members while 2 members voted to maintain the policy rate. Similar to the 1995 mid-cycle adjustment, the FOMC decided to remove the phrase that it ‘will act as appropriate to sustain the expansion’ after reducing the interest rate three times this year.

Overall, the FOMC was neutral on the economy. While it maintained its assessment on job market and consumption, it was less sanguine on investment and exports. The Committee said job gains have been solid, and the unemployment rate remained low. Although household spending has been rising at a strong pace, business fixed investment and exports remain weak. 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 remained low 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 remained.

2019 GDP was maintained at 2.2% and anticipated to ease to 2.0% in 2020. Unemployment forecast remained at 3.7% in 2019 and 2020. Forecast for 2019 and 2020 PCE deflator was constant at 1.5% YoY and 1.9% YoY respectively. Similarly, core PCE deflator forecast was also maintained at 1.8% YoY and 1.9% YoY for 2019 and 2020 respectively. For 2019 and 2020, FOMC members’ projection of median fed fund rate was at 1.9%.

HLIB’s VIEW

After reducing the interest rate for the third time this year, the FOMC signalled that its current rate cut cycle has come to an end as it removes the phrase that ‘it will act as appropriate to sustain the expansion’. Nevertheless, at the start of the press conference, chairman Powell clarified that while the Committee thinks monetary policy is in a good place, they will continue to monitor the effects of policy actions along with information bearing on the outlook as they assess the appropriate path of the target range for the fed funds rate. We take this as a signal that FOMC will pause on future adjustments with the assumption that downside risks to growth does not materialise (e.g. no escalation of US-China trade tension). This decision comes at a time when the 10 year – 2 year Treasury yield curve has rebounded to the positive territory while there is optimism over a potential ‘phase one’ trade agreement between US and China to diffuse trade tension. Nevertheless, we opine that while there is a de escalation of trade tension in the immediate future, downside risks will continue to be present until a permanent agreement between US and China prevails. Closer to home, while we expect BNM to maintain the OPR in the upcoming Nov MPC meeting, we maintain our expectation for BNM to reduce the OPR by 25bps by 1Q 2020.

Source: Hong Leong Investment Bank Research - 6 Nov 2019