● Aligning with traders’ expectations, the US Federal Open Market Committee (FOMC) hiked its policy rate by 25 basis points (bps) to 4.75%-5.00%, in a unanimous vote.

● Our take: The Fed’s view appears to be cautious and remain committal in its effort to quell inflation but not conditional, leaving it with the right flexibility to raise rates again if needed as banking panic subsides.

● Additional firming. "The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2.0% over time," it said.

● On the banking crisis, the FOMC said the recent developments at U.S. banks are "likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation," adding that "the extent of these effects is uncertain."

● No change to dot plot. In the policymaker's summary of economic projections, the median expectation for the federal funds rate at the end of 2023 remained at 5.1%, unchanged from the December projections and indicating the Fed may be nearing its peak rate. Meanwhile, according to the CME FedWatch tool traders see a 49.9% probability of another 25-bp rate hike in May and a 50.1% chance that the federal funds rate will stay unchanged.

● Signals another 25 bps hike at the next FOMC meeting in May. At a post-monetary policy decision press conference Federal Reserve Chair Jerome Powell said "If we need to raise rates higher, we will…rate cuts are not in our base case," adding that some tightening of credit conditions may substitute for rate hikes. "It's highly uncertain" how long the banking turmoil last, he added.

● Almost done. The upshot from the meeting is that the Fed is nearly done hiking. However, the markets are still betting that policymakers will shift from rate hikes to rate cuts towards the 2H23. Currently, market pricing points to a year-end federal funds target rate below 4.50%, meaning that there would be at least two rate cuts of 25 bps each by year end.

● BNM Policy Outlook. In spite of the Fed Chairman’s defence on the banking sector’s resilience and unswerving fight against inflation, we believe Malaysia’s central bank would likely keep the overnight policy rate (OPR) unchanged at 2.75% for the rest of 2023. Nevertheless, the possibility of any rate decision to adjust the policy rate would mainly depend on the inflation trend and growth outlook, and to a certain extent any major fiscal policy decision made by the government.

Source: Kenanga Research - 23 Mar 2023