Following better CPI figures, the FOMC reduced the pace of rate hike to 50bps from 75bps. However, as inflation remains high, the terminal fed funds rate is estimated to be higher at 5.1% than previously forecasted of 4.6%.

DATA HIGHLIGHTS  

The FOMC Raised the Interest Rate by 50bps to 4.25-4.50%.  

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 50bps to 4.25% to 4.50%. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation of 2% over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of the monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial development. 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.  

The Fed expects real GDP to grow by 0.5% YoY in 2022 (previous: 0.2% YoY) and maintain at 0.5% YoY in 2023, lower than previous forecast of 1.2%. On unemployment rate, the Fed reduced its forecast slightly to 3.7% from 3.8% in 2022 but increased to 4.6% in 2023 (previous: 4.4%). On inflation, the Committee has projected inflation to rise further to 5.6% in 2022 (previous: 5.4%) and ease to 3.1% in 2023, higher than previous forecast of 2.8%. Similarly, core inflation is also anticipated to be higher at 4.8% YoY in 2023 (previous: 4.5% YoY) and moderate to 3.5% (previous: 3.1% YoY) in 2023. After reaching policy rate of 4.25-4.50% in 2022, within FOMC’s previous forecast of 4.4%, the Fed expects interest rate to raise further to 5.1%, higher than previous estimate of 4.6%, suggesting 75bps further in 2023 and more restrictive than the longer-run rate of 2.5%.  

All FOMC Policymakers Were in Favour of the Decision.

HLIB’s VIEW

Following better-than-expected CPI performance in the past two months, the FOMC reduced the pace of tightening, to 50bps from 75bps. Nevertheless, despite the cooling headline inflation, the Fed is still cognisant of strong wage growth and tight labour market which could still put persistent pressure on core inflation. Consequently, the fed decided to maintain the hawkish stance as most participants (17 out of 19) anticipate the interest rate to increase further, above 5.0% in 2023, higher than 4.6% projection in September. Following more restrictive monetary policy stance, the Fed also reduced the GDP forecast and increased unemployment rate expectation. Closer to home, we maintain our anticipation for BNM to raise OPR by 50 bps by Mar 2023 following continued economic growth expansion and higher core inflationary pressures.

Source: Hong Leong Investment Bank Research - 15 Dec 2022