As anticipated, the FOMC maintained its target range for the federal funds rate at 1.50%-1.75% and believes the current stance of monetary policy is appropriate to support sustained economic growth while it aims to raise the inflation level to its symmetrical target of 2%.This decision comes at a time when some parts of the US yield curve have started to re-invert (e.g. 5 year – 3 month) while the 10 year – 3 month Treasury yield curve has flattened considerably (current: 8bps; 1st Jan 2020: 34bps). New concerns such as 2019- nCov, while still in its early stage pose downside risks on the outlook. Hence, we maintain our forecast for one more rate cut in in 1H2020.

DATA HIGHLIGHTS

As expected, the FOMC maintained the target range for the federal funds rate at 1.50- 1.75%. The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of the economic activity, strong labour market and inflation returning to the Committee’s 2% objective. The Committee said household spending has been rising at a moderate pace as opposed to a strong pace. Nevertheless, job gains have been solid, and the unemployment rate remained low. They also maintained the assessment that 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. The Committee will continue to monitor implications for economic outlook including global developments and inflation pressures as it assesses the appropriate path of the target range for the federal funds rate.

On the FOMC’s plans for technical operations to implement monetary policy, they stated that decision to purchase Treasury bills and repo operations has succeeded in controlling the federal funds rate. Hence, the Committee decided to reverse the small downward adjustment made in September 2019 to ensure the fed funds rate remains within the target range. On repo operations, the Committee indicated that they will continue to offer repos at least through April 2020 (previous: February 2020).

2020 GDP forecast is anticipated to grow at a moderate pace of 2.0% YoY and ease further to its longer-run growth of 1.9% YoY in 2021. Unemployment rate is expected to improve to 3.5% in 2020 but rise to 3.6% in 2021. PCE inflation is expected to rise at a moderate pace of 1.9% YoY in 2020 and expand further towards the 2.0% YoY objective in 2021. For 2020, FOMC members’ projection of median fed fund rate was held at 1.6%, similar to the rate in 2019 and normalise to 1.9% in 2021. The FOMC members’ projected longer-run rate remained at 2.5%.

HLIB’s VIEW

After reducing the interest rate three times in 2019, the FOMC maintained its interest rate and signalled that it will remain on hold for 2020 as it aims to raise the inflation to 2% YoY following persistently low inflation. The decision to keep rates unchanged was unanimous. To recap, while there were three members who forecasted one rate hike in 2020, majority of members (13/17) expected no policy rate change. This projection will be updated in t he upcoming FOMC meeting in 17-18th March 2020. The decision comes at a time when some parts of the US yield curve have started to re invert (e.g. 5 year – 3 month) while the 10 year – 3 month Treasury yield curve has flattened considerably (current: 8bps; 1st Jan 2020: 34bps). New concerns such as 2019-nCov, while still in its early stage pose downside risks on the outlook. Hence, we maintain our forecast for one more rate cut in 2020.

Source: Hong Leong Investment Bank Research - 30 Jan 2020