● In line with market expectations, the US Federal Open Market Committee (FOMC) hiked its policy rate by 25 basis points (bps) to a target range of 5.00- 5.25%, the highest level since 2007.

● Our take: The Federal Reserve seems to be unsure whether it is going to pause, although both the FOMC and Chairman Jerome Powell agree that they are getting to a situation that is sufficiently restrictive. While it is clear that the Fed is not ready to cut rates yet as inflation remains high, it also opens the possibility that it might still need to raise rates if necessary.

● Fed speak: The Committee hinted it may be the final move as economic risks mount. “The committee will closely monitor incoming information and assess the implications for monetary policy,” it said in a statement. Meanwhile, it omitted a line from its previous statement in March that said 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."

● On the banking crisis, the FOMC reiterated in its statement that “the US banking system is sound and resilient.” In the press conference, Powell said that “banking conditions have broadly improved since March,” but he remains concerned that “…tighter credit conditions for households and businesses…are likely to weigh on economic activity, hiring and inflation,” adding that “the extent of these effects remains uncertain.”

● Still undone? While the futures markets are pricing in roughly 75 bps of reductions in the Fed Funds Rate by the end of 2023, from the current level of 5.00% to 5.25%, Powell vaguely hinted that a rate cut is unlikely to happen. “We on the committee have a view that inflation is going to come down - not so quickly, it will take some time…In that world, if that forecast is broadly right, it would not be appropriate to cut rates.”

● US may avoid a recession. Powell told reporters that “avoiding a recession is, in my view, more likely than having a recession... It’s possible that we have a mild recession.” Citing durable strength of the US job market as the main factor, Powell added that job openings have declined in recent months without a concurrent rise in the unemployment rate, diverging from the historical pattern. That could mean that wage growth could slow and the labor market could loosen, without a broader decline in economic activity.

● BNM Policy Outlook. Earlier, Bank Negara Malaysia, in its Monetary Policy Committee meeting, surprised markets with a 25 bps hike of the overnight policy rate (OPR) to 3.00%. While we believe that BNM might have reached its policy normalization target, there is still room for it to adjust rates.

Source: Kenanga Research - 5 May 2023