While the Fed left the interest rate and asset purchase programme unchanged, the Committee judged that if progress continues broadly as expected, moderation in the pace of asset purchases may soon be warranted. We think an announcement could come as soon as the next meeting in November while interest rates lift-off could start in 2022 as new projections show half of FOMC members now expect interest rate to rise by the end of 2022.

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 improved in recent months, but the rise in COVID-19 cases has slowed their recovery. The Fed acknowledged that inflation is elevated, 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.

Importantly, the Committee judges that if progress continues broadly as expected, moderation in the pace of asset purchases may soon be warranted.

The Fed expects real GDP to recover in 2021 by +5.9% YoY, lower than previous estimate of +7.0% YoY. In 2022, the Fed increased its forecast to moderate to +3.8% YoY (previous: +3.3% YoY). On unemployment rate, the Fed’s forecast edged higher to 4.8% from 4.5% and maintained it at 3.8% in 2022. On inflation, the Committee has projected an upward trajectory of 4.2% YoY, stronger than previous estimate of 3.4%YoY in 2021, but still expect it to moderate to 2.2% YoY (previous: 2.1% YoY) in 2022. Core inflation is also anticipated to rise sharply to 3.7% YoY (previous: 3.0% YoY) and ease to 2.3% YoY in 2022 (previous: 2.1% YoY). In 2021, all FOMC members expect rates to remain at this level. In 2022, 9 FOMC members (previous: 7 FOMC members) anticipate rate to increase and in 2023, 17 FOMC members forecast rate to rise (previous: 13 FOMC members), leading the median interest rate projection to rise in 2022 by 20bps and further 70bps in 2023.

All FOMC policymakers were in favour of today’s actions.

HLIB’s VIEW

The downgrade in GDP and unemployment forecast is consistent with the impact of Delta variant slowing the recovery, but not derailing it. The Fed’s forecast signalled more elevated inflation than in June. Nevertheless, chairman Powell continues to maintained that it is largely transitory in nature. On the job market, there are mixed views on the progress on labour market with some opining that significant progress has already been met. We feel that as economy continues to improve, the Fed could announce its tapering plans as soon as the next meeting in 2nd-3rd November and begin increasing interest rate in 2022.

Source: Hong Leong Investment Bank Research - 23 Sept 2021