The FOMC kept the policy rate at 0.00-0.25% and maintained bond buying programme. Despite a more upbeat assessment on growth, FOMC chair Powell maintained they will not act pre-emptively and have no intention of pulling back from their policies until they see substantial progress towards employment and inflation over time.

DATA HIGHLIGHTS

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

On economic outlook, the FOMC assessed that amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened. The sectors most affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors. 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 the economy and risks to the economic outlook remain. 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 (Dec 20: +4.2% YoY). In 2022, the Fed forecast real GDP to moderate to 3.3% YoY (Dec 20: 3.2% YoY). On unemployment rate, the Fed anticipates it to average to 4.5% (Dec 20: 5.0%) and improve further to 3.9% (Dec 20: 4.2%) in 2022. On inflation, the Committee has forecasted an upward trajectory of 2.4% YoY (Dec 20: 1.8% YoY) in 2021, but to moderate to 2.0% (Dec 20: 1.9%) in 2022 and for the longer run. Core inflation is also anticipated to increase by 2.2% YoY (Dec 20: 1.8% YoY) and normalise to 2.0% in 2022 (Dec 20: 1.9% YoY). In 2021, all FOMC members expect rates to remain at this level. In 2022, 4 FOMC members anticipate rate to increase (Dec 20: 1 FOMC member) and in 2023, 7 FOMC members forecast rate to increase (Dec 20: 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 economic outlook, it maintained its monetary policy stance. Fed chairman continues to reiterate that the recovery remains far from complete. In the labour market, payroll employment remains 8.4mn below pre-pandemic levels while the unemployment rate remains elevated at 6%. Fed chairman also acknowledged that inflation will and may continue to rise, but reiterated its expectation of it being a transitory rise. Fed officials have also stated that they want to see progress in economic data, not forecast, before raising the rates and scaling back bond purchases. 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 - 6 May 2021