A slightly hawkish statement signals another two rate hikes for 2H2018

The US Federal Reserve (US Fed) decided to maintain its federal funds rate (FFR) in the range of 1.75-2.00% in the latest August FOMC meeting, as widely expected. US Fed has raised its policy rates two times so far this year (in March and June FOMC meetings). In the latest statement, the US Fed remained slightly hawkish, guiding that the economic activity has been rising at a ‘strong rate’, a stronger indication compared to the wording of ‘solid rate’ in June FOMC meeting. The US Fed also guided a much better household spending, where it stated that “household spending and business fixed investment have grown strongly.” The change in the assessment of economic outlook reflects the Fed’s optimism on the US economy. The Fed guided that risks to the economic outlook appear roughly balanced.

Despite a hawkish FOMC statement, going forward, we still believe the US Fed will be gradual in its adjustments in the stance of monetary policy. Based on the US Fed dot plots analysis, we are maintaining our view that the US Fed will likely increase its policy interest rate by another two times this year, possibly in September and December meetings, by 25 basis points each. We believe the forward-looking indicator and likely determining factor on the future direction of the FFR is the strengthening of the labor market. This was consistent with Fed’s statement, noting that “assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”

On the inflation front, Fed noted that “both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.” Both the core inflation and core PCE rose to 2.3% and 1.9% respectively in June. We believe higher US inflationary pressure was from both demand and supply side, due to a better labour and economic condition, while the increasing oil price is putting some pressure from the supply side.

Source: Affin Hwang Research - 2 Aug 2018