As expected, the FOMC maintained the policy rate at 0.00-0.25%. The Committee did not announce any new policy decisions or provide details on possible further actions. Nevertheless, FOMC chair Jerome Powell reassured that the Fed would remain accommodative and 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. To enhance the effectiveness of monetary policy accommodativeness, FOMC said they are focused on possible enhancements to longer-run goals. In Malaysia, given uncertain growth outlook, we maintain our expectation for BNM to reduce the OPR by another 25bps in 2020.

DATA HIGHLIGHTS

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

On economic outlook, the committee assessed that following sharp declines in economic activity, employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year. Weaker demand and significantly lower oil prices are holding down inflation. The statement noted that overall financial conditions have improved, in part reflecting policy measures to support the economy and the flow of credit to households and businesses. Going forward, the path of the economy will depend significantly on the course of the virus. 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.

The Fed reiterated that it’s response to this crisis have been guided by the mandate to promote maximum employment and stable prices, along with the responsibility to promote stability of the financial system. To sustain smooth market functioning and foster effective transmission of monetary policy, the Federal Reserve will increase its holdings of Treasury securities, agency residential and commercial mortgage-backed securities at least at the current pace. This week, the Fed also announced an extension of its temporary lending facilities and USD liquidity swap lines.

HLIB’s VIEW

In Fed’s opening statement, FOMC chair Powell noted that despite the improved economic news in May and June, overall economic activity remains well below its level before the pandemic. In the labour market, while the unemployment rate has declined to 11.1%, it remains far above its level before the outbreak. In addition, the economy faces new challenges as Covid-19 cases have started to climb since midJune. As a result, some economic data have weakened as seen in the latest rise in US initial jobless claims data (week ending 18th Jul: 1.42mn; previous week: 1.31mn) and fall in consumer confidence (Jul 92.6; Jun: 98.3). Given highly uncertain outlook, we maintain our expectation for BNM to reduce the OPR by another 25bps in 2020.

Source: Hong Leong Investment Bank Research - 30 Jul 2020