The FOMC kept the policy rate at 0.00-0.25% and maintained bond buying programme. Nevertheless, the Fed upgraded its GDP and inflation forecast, prompting officials to project tighter monetary policy earlier than expected in 2023.

DATA HIGHLIGHTS

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

On economic outlook, the FOMC assessed that progress on vaccinations has reduced the spread of Covid-19 in the US. Amid this progress 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. The Fed assessed that the progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economy 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 has further upgraded its macro forecast for 2021. They expect real GDP to recover in 2021 by +7.0% YoY (previous: +6.5% YoY). In 2022, the Fed maintained its forecast to moderate to 3.3% YoY. On unemployment rate, the Fed retained its forecast to average to 4.5% and improve further to 3.8% (previous: 3.9%) in 2022. On inflation, the Committee has forecasted a upward trajectory of 3.4% (previous: 2.4% YoY) in 2021, and moderate to 2.1% (previous: 2.0%) in 2022. Core inflation is also anticipated to rise sharply to 3.0% YoY (previous: 2.2% YoY). In 2021, all FOMC members expect rates to remain at this level. In 2022, 7 FOMC members anticipate rate to increase (previous: 4 FOMC member) and in 2023, 13 FOMC members forecast rate to increase (Dec 20: 7 FOMC members), leading the median interest rate projection to rise by 50bps in 2023. In the previous meeting, Fed officials predicted rates would be maintained until at least 2024.

During the press conference, Fed chair Powell signalled they held initial talks on timing and condition of an eventual reduction of Fed’s bond buying programme. At present, the Fed 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.

HLIB’s VIEW

As the US economy reopens amid a successful vaccination drive (52.2% of population who received at least one dose), the Fed has upgraded its macroeconomic outlook for the second time. Anticipating inflation will overshoot 2%, most Fed officials have brought forward forecasts for tighter monetary policy in 2023. Despite employment levels still 7.6mn lower than pre-pandemic levels, the Fed also acknowledged that stronger-than-expected inflation could lead to rising inflation expectation, which may lead to a more entrenched inflation cycle. In Malaysia, following slower vaccination progress (10.5% of population who received at least one dose), we maintain our OPR forecast at 1.75% in 2021.

Source: Hong Leong Investment Bank Research - 17 Jun 2021