In an unscheduled meeting on 15th March 2020, the FOMC reduced the policy rate by 100bps to 0.00-0.25% (previous: 1.0-1.25%), increased the size of asset purchase. Due to increasing concerns that Covid-2019 may have a prolonged impact on economic activity, we opine the FOMC would focus on communication and expand the balance sheet further to undertake other crisis era measures in the future should global financial conditions remain volatile. Closer to home, we opine that BNM would cut OPR by 50bps in 2020 to bring it to 2.00%.

NEWSBREAK

On 15th March 2020, FOMC unexpectedly reduced the interest rate by 100bps to 0- 0.25% in an emergency meeting. This meeting is in lieu of the scheduled meeting on 18th March 2020. Fed chair Jerome Powell also noted that The Committee expects to maintain this target range until it is confident that the economy is on track to achieve its maximum employment and price stability goals, indicating the Fed will be patient in its low interest rate approach.

In addition to the interest rates cut, FOMC will also increase the asset purchases by at least USD700bn (USD500bn of Treasury securities and USD200bn of agency mortgage backed securities). The pace of purchases will be conducted at an appropriate pace to support the functioning of financial markets. In the immediate term, Fed chair Powell also said that the most important focus would be the liquidity of the US Treasury market and is prepared to use all its tools to support market functioning to ensure efficient flow of credit to households and businesses. In relation to that, the FOMC also expanded its overnight and term repurchase agreement operations last Friday.

In terms of global coordination, the Federal Reserve together with 5 major central banks, namely the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank also announced a coordinated action to enhance the provision of liquidity via the standing US dollar liquidity swap line arrangements.

In terms of economic data, the FOMC said that information received since the FOMC met in January indicates that the labour market remained strong through February and economic activity rose at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending rose at a moderate pace, business fixed investment and exports remained weak. Going forward, Fed chair Powell said that growth in 2Q20 is expected to be a weak quarter with output declining a bit. However, economic forecast in the 2H20 is highly uncertain and will be dependent on the spread of the virus.

HLIB’s VIEW

As the spread of the virus continues to cause more lockdown in other major countries (Italy, Spain and France) and blocked market transmission as seen in US Treasury markets last Friday, Fed chair Jerome Powell sought to reassure US households, businesses and investors that the central bank was closely monitoring Covid -19 and was prepared to use its tools to act as appropriate to support the economy with 100bps rate cut to 0-0.25% and undertake asset purchase programme. Due to increasing concerns that Covid-2019 may have a prolonged impact on economic activity, we opine the FOMC would focus on communication and expand the balance sheet further to undertake other crisis-era measures in the future should global financial conditions remain volatile. Closer to home, we opine that BNM would cut OPR by 50bps in 2020 MPC meeting amid worsening global and domestic economic conditions due to the Covid-19 outbreak.

Source: Hong Leong Investment Bank Research - 16 Mar 2020