• The US Fed left its Federal funds rate unchanged at the range of 0-0.25%
• Fed’s Dot Plot Shows FFR Will be Held Near Zero Through 2023
• Fed’s balance sheet expansion to continue (maybe for longer) by at least US$120bn per month in order to maintain smooth market functioning.

Additional Stimulus Vital for Growth to Maintain Current Momentum

The US Federal Reserve (US Fed) kept its Federal funds rate (FFR) unchanged at a range of between 0-0.25% for the sixth consecutive meeting. In its latest assessment of the economy, the US Fed noted that economic activity and employment in the US have seen some improvement in the recent months, but still remain well below their levels at the start of the year. Going forward, the US Fed is still of the view that the development of the economy will continue to largely depend on the course of the Covid-19 pandemic. As such, this will also be a considerable downside risk to economic outlook over the medium term, reflecting the ongoing public health crisis to economic hardship globally. As for inflation, US Fed aims to achieve maximum employment and inflation at the rate of 2% over the longer run. In terms of the balance sheet, the US Fed made a change from previous statements, where it now guided the asset purchases will likely continue for longer, noting “until substantial further progress has been made toward the Committee's maximum employment and price stability goals.” The US Fed will keep its asset purchases at US$120bn per month, with its holdings of Treasury securities by at least US$80bn per month and agency residential and commercial mortgage-backed securities by at least US$40bn per month in order to maintain smooth market functioning. The Fed’s balance sheet from asset purchase program has increased from US$4.2trn in February to roughly US$7.2trn currently, sharply higher than US$4.5trn when assets were increased significantly due to the 2008/2009 financial crisis. The US Fed expects to maintain current accommodative stance of monetary policy until inflation achieve moderately above 2% for some time, where longer-term inflation expectations remain well anchored at 2%.

According to the latest dot plot analysis, the US Fed is projecting to hold rates near zero through 2023. Despite the recent rebound in US economic growth in 3Q20, we believe that the sustainability of the country’s GDP growth will largely depend on whether the resurgence in the Covid-19 can be contained with no widespread lockdowns and the availability of a vaccine. Furthermore, the labour market recently has depicted some weakness as certain states have re-imposed lockdown measures which had led to the weekly jobless claims rose sharply to 853k in the week ending December 5 from 716k in the week ending November 29, its highest level since September. Moreover, in order for economic activity to maintain its current momentum, there is a need for additional fiscal stimulus to further support the recovery of the US economy. In the latest FOMC Summary of Economic Projection, the US Fed revised its GDP growth forecast higher from the September FOMC meeting, from 3.6-4.7% to 3.7-5.0% projected for 2021. The unemployment rate in 2021 is projected to be lower with a downward revision to 4.7-5.4% from 5.0-6.2%, previously. On the inflation outlook, the median expectation of PCE inflation in 2021 was also increased to 1.8% in from 1.7% previously, while core PCE inflation projection was also revised higher to 1.8 from 1.7%.

Source: Affin Hwang Research - 17 Dec 2020