FOMC voted to begin the process of tapering its USD120bn per month in asset purchases starting with USD15bn less in November. There are emerging signs of Fed’s concern about the persistency of inflation. As such, it is possible for the Fed to accelerate the rate of tapering its asset purchases before pivoting to an increase in policy rate in 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 over summer has slowed their recovery. The Fed acknowledged that inflation is elevated, largely reflecting factors that are expected to be transitory. The Fed noted that the supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to the sizeable price increases in some sectors. The FOMC added that the path of the economy will depend on the course of the virus, with progress on vaccinations and an easing of supply constraints are expected to support continued gains in employment as well as reduction in inflation. 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.

In light of the substantial progress the economy has made, the Committee decided to begin reducing the monthly pace of its asset purchases by USD10bn for Treasury securities and USD5bn for agency mortgage-backed securities each month starting November 21. Hence, the Committee will increase the holdings of Treasury securities by at least USD70bn per month (previous: USD80bn) and mortgage-backed securities by at least USD35bn a month (previous: USD40bn). The Fed is prepared to adjust the pace of purchases if warranted by changes in economic outlook.

The Fed expects real GDP to recover in 2021 by +5.9% YoY and moderate to +3.8% YoY in 2022. On unemployment rate, the Fed’s forecast is 4.8% in 2021 and 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 in 2022. Core inflation is also anticipated to rise sharply to 3.7% YoY and ease to 2.3% YoY in 2022. In 2021, all FOMC members expect rates to remain at this level. In 2022, 9 FOMC members anticipate rate to increase and in 2023, 17 members forecast rate to rise, leading the median interest rate projection to rise in 2022 by 20bps and further 70bps in 2023.

All FOMC policymakers were in favour of the actions.

HLIB’s VIEW

In today’s meeting, the FOMC acknowledged there is some concern on inflation, with some doubts about the transitory factors driving it. Nevertheless, Fed Chair Powell anticipates inflation to come down in 2Q or 3Q 2022 while he thinks full employment could be achieved in 2022. He reiterated FOMC has the tools to manage inflation. In Malaysia, we opine BNM will increase OPR by 25bps in 2H2022 when the recovery is more entrenched.

Source: Hong Leong Investment Bank Research - 5 Nov 2021