Following better CPI figures, the FOMC reduced the pace of rate hike further to 25bps from 50bps. However, as inflation remains high, the Fed signalled plans to raise rates again in the next FOMC meeting in March.

DATA HIGHLIGHTS  

The FOMC Raised the Interest Rate by 25bps to 4.50-4.75%.  

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 has eased somewhat, but remains elevated. The invasion of Ukraine by Russia contribute to elevated global uncertainty. 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 25bps to 4.50% to 4.75%. 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 extent 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 2023 and 1.6% in 2024. On unemployment rate, the Fed expects it to increase to 4.6% in 2023 and remain steady at 4.6% in 2024. On inflation, the Committee has projected inflation to ease to 3.1% in 2023 and further to 2.5% in 2024. Similarly, core inflation is also anticipated to moderate to 3.5% in 2023 and 2.5% in 2024. After hiking policy rate by 425bps in 2022, 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 and wage growth, the FOMC reduced the pace of tightening further, to 25bps from 50bps. While FOMC officials acknowledged the recent improvement in inflation readings, they did not significantly alter their guidance on future interest rate movements, as they see ongoing increases in the target rate appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time. This implies that the Fed will continue to hike interest rate by 25bps in the next FOMC meeting on 21st-22nd March to bring the fed funds rate to 4.75-5.0%. Fed chair Jerome Powell noted that it is too early to declare victory as they continue to manage against the risk of doing too much and causing recession with the risk of not doing enough to bring down inflation, adding the latter would be more difficult to fix. Closer to home, we maintain our anticipation for BNM to raise OPR by 25bps to bring the policy rate to 3.00% as current policy rate of 2.75% is still seen as accommodative while there remains upside risk to inflation.

Source: Hong Leong Investment Bank Research - 2 Feb 2023