• US Fed left its Federal funds rate unchanged at the range of 0-0.25%
• The FOMC statement cautioned ongoing public health crisis continues to weigh on the economy, and risks to the economic outlook remain
• US Fed Chairman guided that it will ‘take some time’ before Fed is satisfied with economic progress, indicating policy rate will remain unchanged at current level until late 2022 or early 2023

Path of the Economy Will Depend on Progress on Vaccinations

The US Federal Reserve (US Fed) left its Federal funds rate (FFR) at a range of between 0-0.25% for the eight consecutive meeting. In its latest assessment of the economy, the US Fed cautioned that COVID-19 pandemic may still cause human and economic hardship across the United States and around the world. However, it noted that progress on vaccinations and strong policy support will continue to support economic activity and employment, where some sectors most adversely affected by the pandemic are also showing some signs of improvement. We believe US Fed is cautiously positive on economic outlook due to the support from accommodative monetary policy and stimulus policy measures, which provided flow of credit to US households and businesses.

As for inflation, US Fed guided that rising inflationary pressure was reflected by transitory factors. As such, we believe the current accommodative stance of monetary policy will remain for an extended period of time. The FOMC Committee will aim to achieve inflation moderately above 2% for some time so that inflation averages 2% over time and longer‑term inflation expectations remain well anchored at 2%. 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”.

In terms of the balance sheet, the US Fed 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 about US$8trn currently, sharply higher than US$4.5trn when assets were increased significantly due to the 2008/2009 financial crisis.

Recently, US President Biden has proposed to Congress to pass an US$1.8trn stimulus plan in investments and tax credits, as well as US$2trn in infrastructure spending proposal. Despite the proposals on further stimulus spending, we believe that until the vaccine rollout is quickened and stimulus measures are successfully implemented, the sustainability of the country’s GDP growth recovery will still depend on whether the pandemic can be contained with no widespread lockdowns. President Biden has 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. It was reported in the media that as of 28 April 2021, 142.7 million Americans, about 43% of the total population, received at least one dose of vaccine, according to data from the CDC.

Source: Affin Hwang Research - 30 Apr 2021