US Fed to Continue Monitoring Global Developments

The US Federal Reserve (US Fed) kept its Federal funds rate (FFR) unchanged at the range of 1.5-1.75% for the second consecutive meeting. In the latest assessment on the economy, the US Fed remained positive on the labour market conditions supported by solid job gains and low unemployment rate, while US economic activity has been increasing at a moderate pace. However, it highlighted that despite the moderate rise in household spending, business fixed investment and exports continued to be weak. On the inflation front, the US Fed emphasised that it expects inflation to return to the Committee’s symmetric 2% objective, where compared to its previous statement, it guided that “inflation near the Committee’s symmetric 2% objective” is the most likely outcome. This reflected the US Fed’s commitment towards slightly higher inflation.

Besides that, it noted in the press conference that the US Fed’s repo operations would continue through April 2020 to ensure consistent ample supply of reserves. On 28th January, the US Fed added US$84.7bn in liquidity (US$55.75bn overnight repurchase agreement and a US$28.95bn 14-day day repo operation). The US Fed balance sheet stood at US$4.15trn currently, higher than US$3.8trn in September 2019, but still below the high of US$4.5trn in early 2015.

In view of the temporary injection of liquidity as well as favourable growth outlook, we believe the US Fed would not make further policy moves (such as policy interest rates cut) in 1H2020. The US Fed will stand pat as long as the domestic economy remains buoyant. For instance, the labour market remains healthy in December, where despite nonfarm payrolls increasing at a slower pace 145k from 256k in November, unemployment rate remains at a 50-year low of 3.5%. Furthermore, the services sector also remains buoyant as reflected in the ISM Non-Manufacturing PMI, which rose to a four-month high of 55 in December from 53.9 in November. Meanwhile, retail sales in December increased for the third consecutive month to 0.3% mom (0.3% in November). In addition, the easing of trade tensions following the signing of the ‘Phase one’ deal will likely provide some support to business sentiment and investment.

However, apart from uncertainty on the progress towards a ‘Phase two’ trade deal, we believe the US Fed will also monitor the development of the recent outbreak of the coronavirus as well as its potential impact on both the global and US economy if the situation worsens. US Fed Chairman Powell in a press conference highlighted that the Fed acknowledges that the new coronavirus poses a potential risk to the Fed’s outlook.

Source: Affin Hwang Research - 30 Jan 2020