As Expected, the FOMC Maintained the Policy Rate at 0.00-0.25%. The Fed Did Not Make Any Changes to Its Asset Purchases Program But Said It Will Assess How the Ongoing Programme Can Best Support Their Objectives. The Fed Noted That While Economic Activity Has Continued to Recover, It Remains Well Below Pre-pandemic Levels and Cautioned That the Outlook Remains Uncertain.

DATA HIGHLIGHTS

The FOMC maintained the interest rate at 0-0.25%.

On economic outlook, the committee assessed that economic activity and employment have continued to recover in recent months but remain well below their levels at the beginning of the year. Weaker demand and earlier declines in oil prices have been holding down inflation. The statement noted that overall financial conditions remain accommodative, 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. The ongoing health crisis will continue to 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 Fed expects real GDP to contract by 3.7% YoY and recover in 2021, albeit at a shallow pace (+4.0% YoY). On unemployment rate, the Fed anticipates it to average to 7.6% and improve but remain high at 5.5% in 2021. On inflation, the Committee is forecasting a modest growth of +1.2% YoY and +1.7% YoY in 2021, still below the Fed’s target of 2.0%. Likewise, core inflation is anticipated to increase by 1.5% YoY, improve modestly to 1.7% YoY in 2021, and only reach 2.0% in 2023. Almost all Fed’s policymakers foresee no rate hikes through 2023. In 2020 and 2021, all FOMC members expect rates to remain at this level. In 2022, all but 1 FOMC member anticipate rate to remain unchanged. In 2023, 4 FOMC members expect rates to increase while the others forecast it to remain unchanged.

There was no change to the Fed’s stance on asset purchases, as the Federal Reserve will increase its holdings of Treasury securities, agency residential and commercial mortgage-backed securities at least at the current pace.

All voting members were in favour of this policy action.

To recap, FOMC cut the interest rate to zero in March 2020, expanded the balance sheet and launched an array of new emergency lending programmes. In August, they unveiled a new policy framework and formalised it in September. In the previous meeting, the Fed said it expects to maintain the target rate at this level until labour market conditions have reached levels consistent with the Committee’s assessment of maximum employment and inflation has risen to 2.0% and is on track to moderately exceed 2.0% for some time.

HLIB’s VIEW

Against the backdrop of rising Covid-19 infection and absence of fiscal stimulus package, US GDP growth is expected to moderate in 4Q20. In line with this, FOMC chair Powell reiterated the importance of fiscal stimulus to maintain a strong recovery as the Fed maintains its ultra-accommodative stance. We maintain our expectation for FOMC to remain accommodative and possibly introduce refinements to its bond purchases if conditions worsen. In Malaysia, we expect BNM to maintain the policy rate at low levels until 2021.

Source: Hong Leong Investment Bank Research - 6 Nov 2020