Following high and persistent inflationary pressures and strong labour market, the FOMC started the policy tightening cycle by 25bps and indicated median forecast of 6 more rate hikes for 2022.

DATA HIGHLIGHTS

The FOMC Raised the Interest Rate by 25bps to 0.25-0.50%.

On economic outlook, the FOMC assessed indicators of economic activity and employment have continued to strengthen. Job gains have been strong in recent months, and the unemployment rate has declined substantially. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures. The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the US economy are highly uncertain, but in the near term, the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.

In this meeting, the Fed expects that with appropriate firming in the monetary policy stance, inflation is expected to return to 2% objective and the labour market remains strong. Consequently, the Committee decided to raise the target range for fed funds to 0.25% to 0.50% and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee begins to expect reducing its holding of Treasury securities, agency debt and agency mortgage backed securities at upcoming meeting.

The Fed expects real GDP to moderate to 2.8% YoY (Dec: +4.0% YoY) in 2022 and 2.2% in 2023 (Dec: 2.2% YoY). On unemployment rate, the Fed’s forecast remained the same at 3.5% (Dec: 3.5%) in 2022 and 3.5% in 2023 (Dec: 3.5%). On inflation, the Committee has projected inflation to rise further to 4.3% YoY (Dec: 2.6% YoY) in 2022 (Dec: 2.6% YoY) and remain above 2.0% in 2023 (latest: 2.7% YoY Dec: 2.3% YoY). Core inflation is also anticipated to be higher at 4.1% YoY (Dec: 2.6% YoY) and ease slightly to 2.6% YoY (Dec: 2.3% YoY) in 2023. In 2022, all 18 FOMC members anticipate rate to increase, with majority forecasting it to increase by 150bps, potentially implying 6 rate increases (25bps each) at each consecutive FOMC meetings. In 2023, all members anticipate rate to rise further, leading the median interest rate projection to reach 2.8%, higher than the longer-run rate of 2.4%.

All FOMC policymakers were in favour of the decision except James Bullard who favoured a 50bps rate hike.

HLIB’s VIEW

In today’s meeting, the FOMC increased the interest rate by 25bps, as expected. The Fed’s forecast for growth were revised down and inflation projections were revised up reflecting spectrum of risks facing the US economy (persistent inflationary pressures and Russia Ukraine conflict). Consequently, the consensus was for 6 more rate hikes in 2022, double the pace of rate hikes expected in December 2021. Nevertheless, there could be more as 7 out of 16 FOMC members are forecasting more than 6 hikes. While FOMC remains optimistic that unemployment rate will continue to trend downwards in the face of monetary policy tightening, we opine this is a risk as the Fed attempts to cool the economy in the face of stronger and more persistent inflation. As the Fed is expected to tighten monetary policy faster than Malaysia, we maintain our expectation of slight depreciation bias with average USD-MYR at 4.16 vs 4.15 average for 2021.

Source: Hong Leong Investment Bank Research - 17 Mar 2022