● As widely expected, the Federal Reserve raised its key interest rate by 75 basis points (bps) for the second straight time, bringing the federal funds rate target range to 2.25%-2.50% (prev: 1.50%-1.75%). It was approved by all voting members of the Federal Open Market Committee (FOMC).

● Highly attentive to inflation risk. The FOMC said it remains "highly attentive" to inflation risks. Chairman Jerome Powell emphasized the same point in a post-meeting news conference, saying it was "essential" to bring inflation lower.

● Inflation remains elevated, the FOMC observed, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures," referring to the latest CPI reading of an increase of 9.1% in June from a year ago.

● Hikes are showing results. While jobs gains have remained "robust," officials noted in the new policy statement that "recent indicators of spending and production have softened," confirming that the aggressive rate hikes the Fed has put in place since March are beginning to bite.

● Signals a similar hike in next meeting. The FOMC said it expects "ongoing increases in the target range will be appropriate" while Chair Powell said another "unusually large" hike might be appropriate in September if price pressures have not sufficiently abated. Meanwhile, looking ahead to the Fed's Sept. 20-21 meeting, the CME FedWatch tool assigns a 65.0% probability of a 50-bp rate hike and a 35.0% probability of a 75-bp hike.

● Economy is not in recession. In a post-meeting news conference, Chairman Powell said, "I do not think the U.S. is currently in a recession," citing an unemployment rate that is still near a half-century low and solid wage growth and job gains. "It doesn't make sense that the U.S. would be in recession."

● BNM Policy Outlook. The Fed's aggressive posturing and obsession to tame inflation indicate that it would continue to sharply raise interest rates at the expense of growth going forward. The International Monetary Fund has recently revised down global growth for this year and warned of another recession, albeit mild, after the last one barely two years ago. Domestically, inflationary pressure is mounting, registering hotter-than-expected in June (3.4%; May: 2.8%) on the back of pent-up demand and tourism-led spending due to the reopening of international borders and removal of COVID-19 restrictions. This, along with the expectation that GDP growth would continue to be driven by the stronger recovery in domestic demand, we expect BNM would continue to maintain its hawkish tilt and would raise its overnight policy rate (OPR) by at least 25 bps each at its remaining two Monetary Policy Meetings (MPC) for this year.

Source: Kenanga Research - 28 Jul 2022