OVERVIEW

● The Federal Reserve held the fed funds rate steady as expected at the conclusion of its policysetting meeting on June 19, Wednesday. The Federal Open Market Committee (FOMC) left the benchmark interest rate within its target range of 2.25% to 2.5%. Fed Chairman Jerome Powell also saw his first dissent since becoming head of the central bank as nine members voted in favour of the decision while one against; St. Louis Fed President James Bullard voted against the decision, preferring a 25 basis points (bps) rate cut.

● The FOMC removed the word “patient” in favour of language promising to “closely monitor the implications of incoming information for the economic outlook.” This would signal that the Fed would be more inclined to cut rates as some observers interpreted the word “patient” as having a bias toward rate hikes. The Fed said it still sees a “sustained expansion of economic activity, strong labour market conditions, and inflation near” the committee’s 2.0% target, but added that “uncertainties about this outlook have increased”. Echoing Fed Chair Jerome Powell's comments made on June 4, the FOMC says it "will act as appropriate to sustain the expansion, with a strong labour market and inflation near its symmetric 2% objective".

● More members see rate cuts by 2020. New “dot plots” that map out policy-setting members’ preferred rate paths through the next three years, showed the median dot suggest no rate changes through the rest of 2019, and one 25- bps rate cut in 2020. Compared with the dot plots in March it also had the median dot calling for no rate changes by the end of 2019 but projected a rate hike in 2020. The new dot plots show Fed officials tilting closer toward a rate cut by the end of 2019 with seven members of the FOMC see two cuts, one sees one cut and rest expect rates to be unchanged. By the end of 2020 nine members now see a case for up to two rate cuts compared to only seven members seeing a case for a rate cut in the March, before trade tensions escalated and economic data softened. No members see more than two rate cuts through the end of 2021.

● BNM to remain cautious and dovish. With the Fed sounding more dovish and incline to cut rates we reckon Bank Negara Malaysia (BNM) would be more cautious on its outlook on the economy and turn more dovish in its monetary policy stance. We do not think that the Fed would be too eager to cut interest rates but the probability of at least one rate cut is relatively high in our opinion hinging on the impact of the trade war. However, we still think a two rate hike this year is a bit far-fetched at this juncture mainly because the US economy still remains strong plus it needs a large buffer in case it goes into a recession next year. In the event that the domestic economy would slow sharply, we expect BNM to still have the wiggle room to cut rates but unlikely to do so just yet. Another option would be to cut the statutory reserve rate. However, given that the domestic growth trajectory remains only slightly below growth potential and the inflationary trend to remain low, we expect BNM to maintain its accommodative monetary stance and the overnight policy rate at 3.00% in 2019 following a 25 bps cut in May.

Source: Kenanga Research - 20 Jun 2019