• The US Fed left its Federal funds rate unchanged at the range of 0-0.25%
• US Fed noted that recovery in economic activity and employment has eased in recent months
• US Fed will continue with its asset purchases by at least US$120bn per month in order to maintain smooth market functioning.

New stimulus package announced will provide necessary support to economy

The US Federal Reserve (US Fed) left its Federal funds rate (FFR) at a range of between 0-0.25% for the seventh consecutive meeting. In its latest assessment of the economy, the US Fed noted that recovery in economic activity and employment has eased in recent months mainly in sectors that have been affected by the pandemic. The US Fed maintained its the view that the development of the economy going forward will still largely depend on the course of the Covid-19 pandemic as well as the progress on vaccinations. Hence, the public health crisis will continue to be a considerable downside risk to economic outlook. As for inflation, US Fed also kept its target of achieving maximum employment and inflation at the rate of 2% over the longer run. 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%. In terms of the balance sheet, the US Fed guided it will continue to increase its asset purchases at US$120bn per month, with its holdings of Treasury securities by at least US$80bn per month and agency mortgage-backed securities by at least US$40bn per month in order to maintain smooth market functioning and accommodative financial conditions. The Fed’s balance sheet from asset purchase program has increased from US$4.2trn in February to roughly US$7.4trn currently, sharply higher than US$4.5trn when assets were increased significantly due to the 2008/2009 financial crisis.

As previously guided by the dot plot, the US Fed will likely keep its FFR unchanged at 0-0.25% through 2023 in order to support the economy. The US Fed also noted that it expects to maintain its current FFR range until “labour market conditions have reached levels consistent with the Committees’ assessments of maximum employment and inflation”. Recently, there has been some weakness in the labour market as certain states have re-imposed stricter containment measures due to the rise in cases. This was reflected in the weekly initial jobless claims which remained high albeit falling to 900k in the week ending January 16th from 926k in the previous week. We believe that going forward until the Covid-19 vaccines are more widely available, the domestic economy will be supported by the recent announcement of US$1.9trn stimulus package. For instance, the provision of stimulus checks of US$1,400 on top of the US$600 checks earlier approved in December will see a total of US$2,000 provided to each person. Besides that, the labour market will also be supported by the increase in weekly federal unemployment benefits to US$400 until end of September 2021 while the federal minimum wage will also be raised to US$15 per hour from US$7.25 per hour currently. There has also been an emphasis placed on the national vaccine program where US$20bn has been allocated. In addition, President Biden had also recently announced additional measures to accelerate the vaccine allocation and distribution which includes an additional purchase of 200 million vaccine doses. This will bring the planned vaccine supply up from 400 million to 600 million which will be enough to fully vaccinate 300 million people which is about 91% of the total US population. Therefore, until the vaccine rollout is quickened and stimulus measures are successfully implemented, we believe that the sustainability of the country’s GDP growth recovery will still depend on whether the pandemic can be contained with no widespread lockdowns.

Source: Affin Hwang Research - 29 Jan 2021