• The US Fed left its Federal funds rate unchanged at the range of 0-0.25%
• US Fed guided that the pace of recovery in economic activity and employment has quickened recently
• Dot plot analysis shows that US Fed is still projecting to hold rates near zero through 2023, 4 out of 18 Fed members expecting a rate hike in 2022 

Upward inflationary pressure may not persist until labour market strengthens

The US Federal Reserve (US Fed) kept its Federal funds rate (FFR) unchanged at a range of between 0-0.25% for the eighth consecutive meeting. In its latest assessment of the economy, the US Fed noted a more optimistic tone where it noted that the pace of recovery in economic activity and employment have quickened recently. 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 kept its target of achieving maximum employment and inflation at the rate of 2% over the longer run. The US Fed expects to maintain its 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 holdings of Treasury securities by at least US$80bn per month and agency mortgage-backed securities by at least US$40bn per month until considerable progress has been made towards the Fed’s inflation and employment goals. The Fed’s balance sheet from asset purchase program has increased from US$4.2trn in February to roughly US$7.6trn currently.

Going forward, despite the US$1.9trillion American Rescue Plan (ARP) stimulus, based on the latest dot plot analysis, the median dot still suggests that US Fed will likely hold rates near zero through 2023, with only 4 out of 18 Fed members expecting a rate hike in 2022. Despite the steady improvement in labour market conditions as well as a rise in inflation expectations, we also do not anticipate the US Fed to raise its FFR too soon. The US labour market has registered some improvement recently where the nonfarm payroll employment increased by 379k in February from 166k in January while the unemployment rate inched lower to 6.2% in February from 6.3% in January. However, a member of US Fed recently guided that the unemployment rate is closer to 6.8% after taking into account the number of people on temporary layoff who have been misclassified as “employed but on unpaid absence”. Besides that, inflation have also remained below the Fed’s 2% target where core personal consumption expenditures (PCE) inflation rose to 1.5% in January. Although there may be some low-base effects in the coming months which will lead to inflation rising above 2%, we believe upward inflationary pressure may not persist until the labour market has strengthened. In the latest FOMC Summary of Economic Projection, the US Fed revised its GDP growth forecast higher from the December FOMC meeting, from 3.7-5.0% to 5.8-6.6% projected for 2021. The unemployment rate in 2021 is projected to be lower with a downward revision to 4.2-4.7% from 4.7-5.4%, previously. On the inflation outlook, the median expectation of PCE inflation in 2021 was also increased to 2.4% from 1.8% previously.

Source: Affin Hwang Research - 18 Mar 2021