The FOMC kept the policy rate at 0.00-0.25% and maintained bond buying programme. With the resurgence of Covid-19 cases, and its negative impact on growth, FOMC chair Powell signalled they have no intention of pulling back from their policies until the job market recovers and inflation exceed 2% for some time, reaffirming the guidance they have made since August 2020.

DATA HIGHLIGHTS

The FOMC maintained the interest rate at 0-0.25%. On economic outlook, the committee assessed that the pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic. 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. The FOMC added that the path of the economy will depend significantly on the course of the virus, including progress on vaccinations. In the meantime, the Fed emphasised that the ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook. The Committee decided to keep the target range for the federal funds rate at 0–0.25% and expects it will be appropriate to maintain this target range until labour market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.

The Fed expects real GDP to contract by -2.4% YoY and recover in 2021 by +4.2% YoY. On unemployment rate, the Fed anticipates it to average to 6.7% in 2020 and improve but remain high at 5.0% in 2021. On inflation, the Committee is forecasting a modest growth of +1.2% YoY in 2020, 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, and improve modestly to 1.8% 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.

The Fed said they will continue to 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. All voting members were in favour of this policy action.

HLIB’s VIEW

In the near term, against the backdrop of high Covid-19 cases and more infectious variant, US GDP growth is expected to weaken. In line with this, FOMC chair Powell reaffirmed their view of maximum employment as a “broad-based and inclusive goal” and the ability to achieve that objective in the years ahead depends importantly on having longer-term inflation expectations well anchored at 2%. Currently, officials don’t see inflation returning to their 2% goal until 2023. Consequently, we maintain our expectation for FOMC to remain accommodative for 2021. In Malaysia, while there is lower concern of tighter or prolonged MCO2.0, the high case count may continue to constrain mobility and demand going forward, posing downside risk to Malaysia’s GDP forecast. Hence, we opine that BNM may reduce the OPR by another 25bps to 1.50% in 1H 2021.

Source: Hong Leong Investment Bank Research - 29 Jan 2021