The FOMC maintained the policy rate at 0.00-0.25%. The Fed said it would extend the asset purchase programme until ‘substantial further progress’ has been made. While the Fed lifted its economic projection, it still anticipates inflation to return to 2% YoY in 2023 and expects interest rate to remain at current levels for prolonged period.

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 smaller pace of -2.4% YoY (previous: -3.7% YoY) and recover in 2021, at a faster pace (+4.2% YoY; previous: 4.0% YoY). On unemployment rate, the Fed anticipates it to average to 6.7% YoY (previous: 7.6%) and improve but remain high at 5.0% (previous: 5.5%) in 2021. On inflation, the Committee is forecasting a modest growth of +1.2% YoY, unchanged from previous forecast and +1.8% YoY in 2021, still below the Fed’s target of 2.0% YoY (previous: 1.7% YoY). Core inflation is anticipated to increase by 1.4% YoY (previous: 1.5% YoY), improve modestly to 1.8% YoY in 2021 (previous: 1.7% YoY), 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.

The Fed said they will increase bond buying by at least USD80bn/month of Treasury securities and at least USD40bn/month of agency mortgage backed securities until ‘substantial further progress’ has been made toward Committee’s maximum employment and price stability mandate. Previously, the Fed said it would do so ‘over coming months’.

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.

HLIB’s VIEW

In the near term, against the backdrop of rising Covid-19 infection, US GDP growth is expected to moderate. In line with this, FOMC chair Powell reiterated the importance of fiscal stimulus t as the Fed maintains its ultra-accommodative stance. As of writing, US congressional leaders are said to be nearing a deal worth USD900bn after months of pollical impasse. Over the longer-term, despite a somewhat better outlook for growth and employment, officials don’t see inflation returning to their 2% goal until 2023. We maintain our expectation for FOMC to remain accommodative for 2021. In Malaysia, we expect BNM to maintain the policy rate at low levels until 2021.

Source: Hong Leong Investment Bank Research - 17 Dec 2020