● Taper on. The Federal Open Market Committee (FOMC) expectedly decided to start winding back its financial stimulus programme. It emphasised, however, that this does not indicate or signal its future rate decision policy.

● Rates stays put. Meanwhile, as expected the federal funds rate target remains at 0.00%-0.25%. All of the voting members of the FOMC voted in favour of the actions.

● No rush to hike. As the policy rate continues to tether near zero, Fed Chairman Jerome Powell reiterated that the economic bar for raising rates was far higher than that for tapering. It signalled that the FOMC will maintain the policy rate level until "labour market conditions have reached levels consistent with the committee's assessments of maximum employment and inflation has risen to 2.0% and is on track to moderately exceed 2% for some time."

● Process of taper: The FOMC ended its two-day policy meeting with a pledge to reduce its purchases of Treasury securities by USD10.0b per month and agency Mortgaged Backed Securities (MBS) by USD5.0b/month from its current monthly rate of at least USD80.0b for Treasuries and USD40.0b for MBS. The tapering process is set to begin in mid-November, which suggests the stimulus programme or quantitative easing will cease in June 2022. The committee expects that it will take similar reductions each month, "but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook," the Fed said in its statement.

● Minor tweak on inflation communication. The Fed has also tweaked the language it used to describe its inflationary expectation. It said the factors driving upward pressure on prices is “expected to be transitory”, whereas previous statements said inflation was being largely driven by “transitory factors”. Implicitly it could be interpreted as a subtle admission that higher prices could persist for longer than it had anticipated.

● BNM policy outlook. We reiterate our view that as Malaysia moves toward an endemic phase, from the pandemic, and gradually eases movement restrictions, as well as allows more sectors to operate, the economy would gradually improve. This would likely diminish the need for monetary policy easing. In fact, as the economic recovery momentum picks up and stabilises, we might expect BNM to move towards tightening, possibly in the 2H22.

Source: Kenanga Research - 5 Nov 2021