● As expected, the US Federal Open Market Committee (FOMC) hiked its policy rate by 25 basis points (bps) to 4.50%-4.75%, the highest level since October 2007, slowing the rapid tightening campaign that ratcheted up its rate by 425 bps in 10 months.

● Unanimous. All 12 voting members of the Federal Open Market Committee voted for the policy decision.

● Maintains mission. In an effort to convince financial markets that the Fed is intent on keeping rates high to bring down inflation, the FOMC repeated its stance that "ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2.0% over time.”

● Reaffirms strategy. At the same time, the FOMC reaffirmed its longer-run goals and monetary policy strategy, a message to markets that it is not considering adjusting its inflation goal higher than the 2.0% target. Meanwhile, it noted "modest growth in spending and production" and that "inflation has eased," but remains "elevated."

● Fresh view. Overall, there was less language about crises facing the economy and it seems less pessimistic about the effect of Russia's war in the Ukraine on the US economy, but there was no mention on the impact of China’s reopening.

● Hinting of another 25 bps hike at the next FOMC meeting in March. At a post-monetary policy decision press conference Federal Reserve Chair Jerome Powell said "we have more work to do" to bring down inflation. That is a relatively vague signal to financial markets that the Fed is not planning on backing down from its policy tightening, especially when the labor market is still extremely tight, with job gains being robust. "Although the pace of jobs growth has slowed", the labor market is still "out of balance," he said.

● BNM Policy Outlook. In spite of the FOMC decision and Fed Chairman’s consistent hawkish signal, we believe Malaysia’s central bank would likely keep the overnight policy rate (OPR) unchanged at 2.75% for the rest of 2023. More importantly, we believe that BNM’s surprising decision to not raise the OPR by 25 bps in its last Monetary Policy Committee (MPC) meeting is a signal to pause its current normalisation cycle that began in May last year. Moving forward, the possibility of a rate change decision depends mainly on the inflation trend and growth outlook, as well as any major fiscal policy decision made by the government.

Source: Kenanga Research - 2 Feb 2023