The FOMC kept the policy rate at 0.00-0.25% and maintained bond buying programme. Despite improved growth and inflation projections, FOMC chair Powell signalled they will not act pre-emptively and have no intention of pulling back from their policies until they see maximum employment and inflation exceed 2% for some time.

DATA HIGHLIGHTS

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

On economic outlook, the FOMC assessed that following a moderation in the pace of recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak. Inflation continues to run below 2%. 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 recover in 2021 by +6.5% YoY, significant improvement from December forecast of +4.2% YoY. In 2022, the Fed forecast real GDP to moderate to 3.3% YoY, slight increase from earlier projection of 3.2% YoY. On unemployment rate, the Fed anticipates it to average to 4.5%, better than previous forecast of 5.0% and improve further to 3.9% (previous: 4.2%) in 2022. On inflation, the Committee is forecasting an upward trajectory of 2.4% YoY (previous: 1.8% YoY) in 2021, but to moderate to 2.0% (previous: 1.9%) in 2022 and for the longer run. Core inflation is also anticipated to increase by 2.2% YoY (previous: 1.8% YoY) and normalise to 2.0% in 2022 (previous: 1.9% YoY). While there are now additional FOMC members who expect some rate increases starting in 2022, majority of Fed’s policymakers foresee no rate hikes through 2023. In 2021, all FOMC members expect rates to remain at this level. In 2022, 4 FOMC members anticipate rate to increase (previous: 1 FOMC member) and in 2023, 7 FOMC members forecast rate to increase (previous: 5 FOMC members).

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

Despite Fed’s improved forecast of growth and inflation prospects, the Fed emphasised that recovery remains far from complete and will not react pre-emptively. FOMC chair Powell also noted that inflation is expected to see upward pressure due to base effect and strong initial demand that could outstrip supply in the short run. However, he expects this to be transient in nature. This is reflected in the median inflation projection of 2.4% in 2021 before moderating to 2.0% in 2022. Consequently, we maintain our expectation for FOMC to remain accommodative for 2021. In Malaysia, we opine that BNM will maintain the OPR at 1.75% in 2021.

Source: Hong Leong Investment Bank Research - 18 Mar 2021