Following high and persistent inflationary pressures and strong labour market, the FOMC raised policy rate by 50bps and indicated additional 50bps hike in the next two meetings (14-15th June and 26-27th Jul), but ruled out 75bps rate hike.

DATA HIGHLIGHTS

The FOMC Raised the Interest Rate by 50bps to 0.75-1.00%.

On economic outlook, the FOMC assessed although overall economic activity edged down in the first quarter, household spending and business fixed investment remained strong. Job gains have been robust 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 and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity. In addition, Covid-19 related lockdowns in China are likely to exacerbate supply chain disruptions. Following these developments, the Committee is highly attentive to inflation risks.

The Fed expects that with appropriate firming in the monetary policy stance, inflation is expected to return to 2% objective and the labour market to remain strong. Consequently, the Committee decided to raise the target range for fed funds to 0.75% to 1.00% and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee decided to begin reducing its holding of Treasury securities, agency debt and agency mortgage backed securities on 1st June by letting USD47.5bn in Treasuries and mortgage bonds roll off for each of the three months and then increasing it to USD95bn starting in September.

The Fed expects real GDP to moderate to 2.8% YoY in 2022 and 2.2% in 2023. On unemployment rate, the Fed’s forecast remained the same at 3.5% in 2022 and 3.5% in 2023. On inflation, the Committee has projected inflation to rise further to 4.3% YoY in 2022 and remain above 2.0% in 2023. Core inflation is also anticipated to be higher at 4.1% YoY and ease slightly to 2.6% YoY in 2023. In 2022, majority of FOMC members expect it to increase by 150bps, to reach 2.0% by the end of 2022. However, this could be revised further. 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.

HLIB’s VIEW

The FOMC increased the interest rate by 50bps and announced its decision to reduce the Fed’s balance sheet starting from next month, as expected. During the press conference, FOMC chair Powell said there is a broad sense on the committee that additional 50bps increases should be on the table at the next couple of meetings, which we read as June and July FOMC meetings. He also clarified the Fed is not actively considering raising interest rates by 75bps, as what was noted by Fed Reserve Bank St. Louis President James Bullard, who is considered a hawk and expected by some in the financial markets. The Fed also reiterated its optimistic outlook saying it expects labour market to remain strong. While we acknowledge that consumers are in a stronger position, we see this as a risk as the Fed’s priority is to cool the economy in the face of stronger and more persistent inflation. In Malaysia, as our economic recovery is more measured and inflationary pressures more muted compared to the US, we maintain our expectation of BNM to retain the OPR at 1.75% in the upcoming May MPC meeting and raise OPR by 25bps in 4Q22.

Source: Hong Leong Investment Bank Research - 5 May 2022