● As widely expected, the Federal Open Market Committee (FOMC), kept the federal funds rate target range at 1.50%-1.75% and signalled it would keep them on hold through 2020 amid a solid economy. The move to stand pat comes after three rate cuts earlier this year; the last rate increase was a year ago.

● Sanguine outlook. The FOMC reiterated in its statement that economic activity has been rising at a “moderate’’ rate with “solid’’ job gains. Officials seem to be more confident that their policy would remain supportive of growth in coming years even with the U.S. and China yet to reach a trade deal, Brexit’s future in question and a lacklustre global economic outlook. The Fed, in its first unanimous vote since May, said it will continue to monitor the implications of data for the economic outlook “including global developments and muted inflation pressures.” It also removed an earlier reference to “uncertainties” remaining about the outlook.

● Dot plot – majority expects no change in 2020. The FOMC dot plot shows a divergence among Fed officials as to whether rates will stay put or rise in 2020. Eight FOMC participants expect the federal funds rate to stay where it is next year, while six of them project a rate between 2.0% and 2.25%. As many Fed officials had been indicating in recent comments, they see the current stance of monetary policy as "appropriate to support sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee's symmetric 2.0% objective". Meanwhile, Fed Chairman Jerome Powell, in his opening remarks at his press conference, points out that the central bank remains strongly committed to its 2.0% inflation target.

● BNM to still lean towards easing. Although the Fed has made it clear that there would be no further rate cut next year, we still believe that Bank Negara Malaysia may still need to cut interest rates though the probability for a bigger cut would be less. Given the prevalent state of uncertainty in both the global and domestic economy, the general view is that BNM monetary policy bias would still lean towards a rate cut. The low inflationary environment and a slowing economy would provide ample room and policy justification for BNM to embark on at least one rate cut in the near term, possibly in the 1Q20, bringing the overnight policy rate to 2.75% from the current 3.00%.

Source: Kenanga Research - 12 Dec 2019