OVERVIEW

● As expected the Federal Reserve’s Federal Open Market Committee (FOMC) leaves target range for the Fed Funds rate at 2.25%-2.50%. The vote to hold policy steady was unanimous. Separately, in a statement the Fed said that in May it would slow the pace at which it is shrinking its USD4.0 trillion asset portfolio and end its runoff of its treasury holdings at the end of September, exactly two years after it began the process. The two decisions complete the Fed’s 2019 pivot away from policy tightening and toward a markedly cautious stance.

● 'Dots' reflect Fed's more dovish outlook. Together with the FOMC's rate decision, the Fed releases the “dot plot” of likely rate decisions in the upcoming meetings and updated economic projections. For the 2019 year-end expectations for the Fed Funds rate, the "dots" points to 2.375% against the previous expectation of 2.875%. On the economic outlook, the Fed sees 2019 GDP growth at 2.1% (2.3% previously), and 2020 at 1.9% vs. 2.0% previously. Core PCE inflation this year and in 2020 and 2021 continues to be seen at 2.0% across the board.

● The Fed doubling down on patience. While the no rate change is expected, the Fed’s more dovish signal has surprised many. Sounding more concern on the state of global inflation during his post-meeting press conference, the Federal Reserve Chairman Jerome Powell is reinforcing its “patience” stance. This also suggest that every concern it has raised on the sign of weakening in the economy since late last year should be treated as real and present and not a fleeting concern. On this pretext, we believe there will be a temptation for avid Fed watchers in the coming weeks to treat every key economic data and report with great significance for its potential to push the Fed in one direction or the other.

● BNM monetary stance to tilt towards easing. With the Fed is sounding increasingly cautious on growth and dovish in its monetary stance, the world central banks are mostly beginning to tilt their monetary policy towards a more neutral stance or moving towards easing. As a result, we believe that it would also give Bank Negara Malaysia (BNM) more room to adjust its short-term benchmark interest rate lower this year. It also means probability that BNM would cut the overnight policy rate (OPR) has increased by another notch. However, a definite rate cut decision by BNM would still hinge on how sharp the deceleration of Malaysia’s growth trajectory would be going forward. In the event that the domestic economic indicators would slow sharply, we expect BNM may not hesitate to ease its monetary policy stance and cut the OPR. For now, we maintain our stance the OPR would remain unchanged this year. Any indication that BNM would forecast a lower GDP growth for 2019 than the 4.9% projected by the Ministry of Finance as well as a more dovish signal by BNM at its next Monetary Policy Committee meeting in May would give us a strong reason to predict a possible rate cut by BNM in the 2H19. BNM would release its annual report on March 27 where it would provide a fresh outlook on the economy for this year and may differ in its forecast from that of the Ministry of Finance which apparently still has a relatively more sanguine outlook on the economy.

Source: Kenanga Research - 21 Mar 2019