● No surprises from the Federal Reserve as they unanimously leave monetary policy unchanged. The Fed funds target range remains 0-0.25%.

● Status quo on QE. The statement reiterates that the USD120.0b of monthly asset purchases (USD80.0b for Treasuries and USD40.0b for Mortgage Backed Securities) will continue “until substantial further progress has been made toward the committee’s maximum employment and pricestability goals.”

● Remains dovish. The Fed continued to deliver a fairly dovish message to the markets. The descriptive element of the Federal Open Market Committee (FOMC) statement is little changed from the one released in January other than to acknowledge economic indicators have “turned up recently, although the sectors most adversely affected by the pandemic remain weak”.

● Upgrades forecast. The Fed has raised their 2021 growth forecast from 4.2% to 6.5% and lowered their 4Q21 unemployment forecast to 4.5% from 5.0%. They also raised their inflation forecasts with the core PCE deflator expected to end the year at 2.2% rather than 1.8% and come in at 2.0% in 2022 and 2.1% in 2023.

● Dot plot shows modest changes, but the median forecast remains for no rate rise before 2024. There has been some movement though with 7 FOMC members out of 18 now predicting a rate rise by end-2023, up from 5 out of 17 three months ago. This is despite projected unemployment rate to decline to 3.5% in 2023 from over 6.0% currently. We also now have 4 members going for a rate rise in 2022 versus 1 in December.

● Rising tides. While bond markets can take comfort from the Fed delivering on its promise to go slowly with rate hikes, despite inflation creeping above the 2.0% target, the monetary tide is nevertheless turning. Whereas, back in December, only five of 18 Fed officials predicted higher rates in 2023, seven now expect a rate hike in that year and a third of the committee expects that more than one will be needed. Four participants now project hikes for 2022, compared to just one in December.

● BNM policy outlook. We reiterate our outlook of Bank Negara Malaysia’s monetary policy that it is edging closer to a neutral policy stance on better growth recovery prospect and rising inflation going into 2H21. The relatively smooth and increasingly wider vaccination rollout along with the reduction in the number of daily COVID-19 cases would also boost the prospect of economic growth recovery going forward. Hence, we expect BNM to retain the overnight policy rate at 1.75% this year. However, we reckon that there is still room to cut the OPR by 25 to 50 basis points should the economic recovery momentum buckle or the COVID-19 situation turn for the worse in the near-term.

Source: Kenanga Research - 18 Mar 2021