Following persistent high inflationary pressures and strong labour market, the FOMC raised policy rate by 75bps and indicated further large increases to cool demand and moderate inflation.

DATA HIGHLIGHTS

The FOMC raised the interest rate by 75bps to 3.00-3.25%.

On economic outlook, the FOMC assessed recent indicators point to modest growth in spending and production. 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 3.00% to 3.25% 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 USD95.0bn in Treasuries and mortgage bonds roll off for each of the three months (Sep, Oct, Nov).

The Fed expects real GDP to moderate sharply to 0.2% YoY in 2022 (June: 1.7%) and 1.2% in 2023 (June: 1.7%). On unemployment rate, the Fed increased its forecast to 3.8% in 2022 (June: 3.7%) and 4.4% in 2023 (June: 3.9%). On inflation, the Committee has projected inflation to rise further to 5.4% in 2022 (June: 5.2% YoY) and 2.8% in 2023 (June: 2.6%). Core inflation is also anticipated to be higher at 4.5% YoY (June: 4.3%) and ease slightly to 3.1% (March: 2.7%) in 2023. In 2022, majority of FOMC members expect the policy rate to reach 4.4% by end of 2022, suggesting a 75bps and 50bps in November and December FOMC meeting respectively. In 2023, all members anticipate rate to rise further, leading the median interest rate projection to reach 4.6%, higher than previous forecast of 3.8% and more restrictive than the longer-run rate of 2.5%.

All FOMC Policymakers Were in Favour of the Decision.

HLIB’s VIEW

The FOMC increased the interest rate by 75bps. Latest inflation figures showed headline inflation moderated following lower gasoline price. Nevertheless, core inflation accelerated due to rise in shelter inflation. Going forward, headline inflation could moderate further, taking cue from further easing in gasoline prices. However, core inflation could remain stubbornly high due to persistent increase in shelter cost in the immediate future and strong labour market. This could lead the Fed to continue its aggressive rate hike path. During the press conference, FOMC chair Jerome Powell acknowledged that chances of a soft landing are likely to diminish to the extent that policy has to be more restrictive, but the alternative of failing to restore price stability would lead to greater pain later on. As the latest Fed projections signal a more hawkish rate hike path, we anticipate ringgit to depreciate further towards the end of the year and average USD/RM 4.40 (previous: USD/RM 4.30). In Malaysia, low base effect, continued recovery in the labour market and reopening of international borders, are expected to further support Malaysia’s GDP in the 3Q22. Nevertheless, for now we maintain our expectation of BNM to pause in November MPC as it assesses global developments and its effect on future domestic growth.

Source: Hong Leong Investment Bank Research - 22 Sept 2022