Following high and persistent inflationary pressures and strong labour market, the FOMC raised policy rate by 75bps and indicated another unusually large increase could be appropriate at the next meeting, depending on data releases.

DATA HIGHLIGHTS

The FOMC Raised the Interest Rate by 75bps to 2.25-2.50%.

On economic outlook, the FOMC assessed recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. The invasion of Ukraine by Russia and related events are creating additional upward pressure on inflation and are weighing on global economic activity. Following these developments, the Committee is highly attentive to inflation risks.

The Committee is strongly committed to returning inflation to its 2% objective. Consequently, the Committee decided to raise the target range for fed funds by 75bps to 2.25% to 2.50% and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue to reduce its holding of Treasury securities, agency debt and agency mortgage backed securities by letting USD47.5bn in Treasuries and mortgage bonds roll off for each of the three months (Jun, Jul and August) and then increase it to USD95bn starting in September.

The Fed expects real GDP to moderate sharply to 1.8% YoY in 2022 (March: 2.8%) and 1.7% in 2023 (March: 2.2%). On unemployment rate, the Fed’s increased its forecast to 3.7% in 2022 (March: 3.5%) and 3.9% in 2023 (March: 3.5%). On inflation, the Committee has projected inflation to rise further to 5.2% in 2022 (March: 4.3% YoY) and 2.7% in 2023 (March: 2.6%). Core inflation is also anticipated to be higher at 4.3% YoY (March: 4.1%) and ease slightly to 2.7% (March: 2.6%) in 2023. In 2022, majority of FOMC members expect the policy rate to reach 3.4% by end of 2022 (March: 2.0%). In 2023, all members anticipate rate to rise further, leading the median interest rate projection to reach 3.8%, higher than previous forecast of 3.4% and 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 75bps and said they might do another unusually large increase in September but will be guided by data and at some point will slow the pace of rate increases. During this meeting, the Fed acknowledged that recent economic data have showed signs of slowing down. Fed chair Powell also noted that it may be too early to declare victory over inflation until they see a convincing trend of lower inflationary pressures in the economy. Hence, we continue to expect the Fed to continue its path of increasing interest rates in the near future. With higher interest rates, other economic figures have started to paint a mix picture of the economy, fuelling fears that a recession is looming as industrial production declined slightly in June, real personal consumption expenditure also contracted slightly in May. Nevertheless, labour market continues to show expansion, albeit at a slower pace. In Malaysia, reopening of international borders, transition to endemicity and special EPF withdrawal scheme are expected to support Malaysia’s GDP in the 2Q2022. We maintain our expectation of BNM to increase the OPR by an additional 25bps in September MPC meeting to end the year at 2.5%.

Source: Hong Leong Investment Bank Research - 28 Jul 2022