As expected, the FOMC maintained the policy rate at 0.00-0.25%. After reducing the policy rate and injecting significant liquidity since 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. Underscoring the accommodativeness bias, all 17 Fed officials expect to hold rates through 2021 while 15 out of 17 members project zero rate s in 2022. Closer to home, we maintain our expectations that BNM would reduce OPR by 25bps in 2H20 as the economy is anticipated to have a slow economic recovery from the pandemic-induced recession.

DATA HIGHLIGHTS

As expected, the FOMC maintained the interest rate at 0-0.25%.

On economic outlook, the committee notes that the virus and the measures taken to protect public health have induced declines in economic activity and a surge in job losses. Weaker demand and significantly lower oil prices are holding down inflation. The statement noted that financial conditions have improved, in part reflecting policy measures to support the economy and 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.

The Fed expects real GDP to contract by 6.5% YoY (Dec projection: +2.0% YoY) and recover into positive territory in 2021 (+5.0% YoY; previous: +1.9% YoY). On unemployment rate, the Fed anticipates it to climb to 9.3% (previous: 3.5%) and recover but remain high at 6.5% in 2021 (previous: 3.6%). On inflation, the Committee is forecasting a modest growth of +0.8% YoY (previous: +1.9% YoY) and increase to +1.6% YoY (previous: +2.0% YoY), still below long run rate. In line with the slow recovery expected in 2021, almost all Fed’s policymakers foresee no rate hikes through 2022.

To support the flow of credit to households and businesses over coming months, the Federal Reserve will increase its holdings of Treasury securities, agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning. FOMC chair Powell also said they will continue their discussions on approaches for conducting monetary policy when fed fund rate is at its lower bound (e.g. targeting interest rates along the yield curve).

HLIB’s VIEW

Despite the improvement seen in May jobs report, unemployment remains historically high at 13.3%. The Fed also expects unemployment rate to be at 9.3% by the end of the year. At the same time, weak demand is expected to hold down consumer prices. As the Fed thinks the extent of the downturn and pace of recovery remain highly uncertain and sluggish, the Fed maintained its ultra-accommodative stance. The Fed extended its forward policy guidance (current zero rates) through 2022 and said they will continue to purchase Treasury and agency mortgage-backed securities at least at the current pace. They will closely monitor developments and adjust the plans as appropriate. In Malaysia, we opine that BNM would cut OPR by 25bps in 2H2020 as the economy is anticipated to have a slow economic recovery from the pandemic - induced recession

Source: Hong Leong Investment Bank Research - 11 Jun 2020