As expected, the FOMC maintained the policy rate at 0.00-0.25%. After reducing the policy rate and injecting significant liquidity in March 2020, the Committee decided not to announce any new policy decisions but pledged to be patient in maintaining the current accommodative stance until it is confident the economy is on track to achieve the maximum employment and price stability goals. Hence, we opine the FOMC would focus on communication and expand the balance sheet to maintain an accommodative stance for a prolonged period of time. Closer to home, while BNM has undertaken a range of measures to support household, businesses and financial markets, we opine that BNM would reduce OPR by 50bps in 2020 to bring it to 2.00%, starting the cut in the upcoming 5th May MPC meeting.

DATA HIGHLIGHTS

As expected, the FOMC maintained the interest rate at 0-0.25%. Fed chair Jerome Powell started the statement by reiterating the Committee is using its full range to support the US economy and expects to maintain the accommodative stance until it is confident the economy is on track to achieve employment and price stability goals.

On economic outlook, he notes that the virus and the measures taken to protect public health are inducing sharp declines in economic activity and a surge in job losses. Weaker demand and significantly lower oil prices are holding down inflation. The disruptions to global and domestic economic activity have significantly affected financial conditions and impaired the flow of credit to households and businesses. As the ongoing health crisis will weigh heavily on economic activity, employment, and inflation in the near term, as well as pose considerable risks to the economic outlook over the medium term, the Committee has decided to maintain the policy rate at its current level until it is confident the economy has weathered the crisis and is on track to achieve its maximum employment and price stability goals.

To support the flow of credit to households and businesses, the Federal Reserve will continue to purchase Treasury securities, agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning. The Fed is also undertaking programs to directly support the flow of credit to the economy for households, businesses and state and local governments. Going forward, in determining the timing and size of future adjustments to the stance of monetary policy, the Committee will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

HLIB’s VIEW

Following the global health crisis and the measures to protect against the virus, economic activity is expected to suffer at an unprecedented rate. In the 1Q20, GDP fell by -4.8% on a seasonally adjusted annualised basis, marking the largest drop since 4Q08 during the Global Financial Crisis. As the lockdown measures that started towards the end of March was extended into April and beyond, we expect economic activity to drop at a sharper and unprecedented rate in 2Q20. Following the sharp rise in jobless claims of 26.5mn workers in short span of 5 weeks, the upcoming labour market report is also expected to show that the unemployment rate surge into double digits. Due to increasing concerns that Covid-2019 may have a prolonged impact on economic activity, we opine the FOMC would continue to focus on communication and expand the balance sheet further to maintain flow of credit to the economy. 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 - 30 Apr 2020