The FOMC kept the policy rate at 0.00-0.25% and maintained bond buying programme. Nevertheless, the Fed said the economy has made progress towards its goals and will continue to watch incoming data closely and its implications on bond purchase programme and interest rate projection.

DATA HIGHLIGHTS

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

On economic outlook, the FOMC assessed that with progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most affected by the pandemic have shown improvement but have not fully recovered. The Fed acknowledged that 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 on the course of the virus, with progress on vaccinations likely to continue to reduce the effects of public health on the economy . Nevertheless, downside risks 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 also 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 progress has been made toward its maximum employment and price stability mandate. Nevertheless, the Fed noted that the economy has made progress towards these goals and the Committee will continue to assess the development in coming meetings.

The Fed expects real GDP to recover in 2021 by +7.0% 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% in 2022. On inflation, the Committee has forecasted an upward trajectory of 3.4%YoY in 2021, and moderate to 2.1% YoY in 2022. Core inflation is also anticipated to rise sharply to 3.0% YoY. In 2021, all FOMC members expect rates to remain at this level. In 2022, 7 FOMC members anticipate rate to increase and in 2023, 13 FOMC members forecast rate to increase, leading the median interest rate projection to rise by 50bps in 2023.

All FOMC policymakers were in favour of today’s actions. Going forward, the Committee will continue to take into account incoming information, including public health readings, labour market conditions, inflation pressures and expectations as well as financial and international developments in assessing the appropriate monetary policy stance.

HLIB’s VIEW

The Fed acknowledged that inflation has risen but maintained that it is largely transitory in nature. In addition, the Fed also noted that while the economy is making progress, it still has a long way to go to pre-pandemic levels, especially on the job market front. Consequently, we opine the Fed will continue to maintain its accommodative stance in 2021. In Malaysia, following the significant uptick in vaccination progress (53.3% of adult population who received at least one dose), we retain our OPR forecast at 1.75% in 2021.

Source: Hong Leong Investment Bank Research - 29 Jul 2021