• The possibility of Democratic ticket of Joe Biden to defeat the Republican ticket to become the 46th US President remains uncertain
•  If the Democrats were to take control of both House and Senate (still uncertain), we believe this may increase the chances of an agreement on another large fiscal stimulus package to support the US economy from Covid-19 outbreak
• The US Fed kept its Federal funds rate unchanged at the range of 0-0.25%, signals readiness to provide more stimulus
• US Fed likely to keep its Federal fund rate near-zero for an extended period

In the latest FOMC meeting, US Federal Reserve (US Fed) kept its Federal funds rate (FFR) unchanged at a range of between 0-0.25% for the fifth consecutive meeting, in line with market expectations. In its latest assessment of the economy, the US Fed noted that economic activity and employment in the US have continued to show improvement, but remain well below their levels at the start of the year. Besides that, overall financial conditions have remained accommodative partly due to policy measures to support the economy and flow of credit to households and businesses. Going forward, US Fed cautioned that the development of the economy will continue to largely depend on the course of the outbreak, where the public health crisis will continue to dampen economic activity, employment, and inflation in the near term. As such, this will also be a considerable downside risk to economic outlook over the medium term. In terms of inflation, US Fed aims to achieve maximum employment and inflation at the rate of 2% over the longer run. In the first nine months of 2020, headline inflation has averaged 1.3% yoy while core-CPI and core-PCE have averaged 1.7% yoy and 1.4% yoy, respectively.

Fthe usAs for the balance sheet, the US Fed guided that it will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace in order to maintain smooth market functioning. The Fed’s balance sheet from asset purchase program has expanded from US$4.2trn in February to roughly US$7.1trn currently, sharply larger than the high of US$4.5trn during the financial crisis of 2008–2009.

The US Fed expects to maintain its FFR at its current range until “labour market conditions have reached levels consistent” with the Fed’s assessment of maximum employment and inflation of 2% and is on track to moderately exceed 2% over some time. It will also “continue to monitor the implications of incoming information for the economic outlook” and would be ready to adjust its stance of monetary policy as appropriate if risks emerge.

Going forward, we believe the US Fed to maintain its current level of FFR at 0-0.25% for the time being and possibly an extended period of time despite recent economic indicators showing a strong improvement in economic activity in 3Q20 and sustained improvement in the labour market. Apart from the US election uncertainty, there remains headwinds for economic growth, especially the handling of the Covid-19 crisis, due to the sustained rise in cases in the US which could result in lockdown measures in certain states. Nevertheless, in 3Q20, the US economy rebounded by seasonally adjusted annualised rate of 33.1% from a sharp decline of -31.4% in 2Q20, its first positive growth since 4Q19 supported by personal consumption expenditures, private inventory investment, exports, non-residential fixed investment and residential fixed investment. In the labour market, the unemployment rate has fallen for the fifth consecutive month to 7.9% in September from its last peak of 14.7% in April 2020 supported by the resumption of economic activity

Source: Affin Hwang Research - 9 Nov 2020