● As widely expected, the US Federal Open Market Committee (FOMC) unanimously kept its policy rate at 5.25%-5.50% for the second straight meeting this year. Its last rate hike was in July, which brought the rate to a 22-year high.

● Our take: It seems that the FOMC is now in "hold" mode, albeit in a hawkish way, rather than simply on "pause," signalling the bar to further rate increases is higher now than it was a few months ago. It made modest changes to its policy statement, adjusting it to reflect a stronger labour market and more restrictive financial conditions.

● Fed speak: The post-meeting statement continued to characterise inflation as "elevated." Additionally, the Committee maintained that "additional policy firming" may be "appropriate" to achieve the 2.0% inflation target. In short, the FOMC is keeping open the door to hiking rates again if economic and financial developments warrant.

● Maintains current pace of quantitative tightening. Even though the Fed did not raise rates, it is continuing to shrink its balance sheet, which acts to tighten monetary policy. "The committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans," it said.

● Proceeding with caution. In the post-monetary policy decision press conference Fed Chair Jerome Powell said that the FOMC is "proceeding carefully" given that it has raised its policy rate by 5.25 percentage points since March of 2022. He said the risks of doing too much versus the risk of not doing enough are "getting closer to being in balance."

● Watching bond yields closely. When asked what extent rising long-term bond yields affected the Federal Reserve’s rate decision, Powell said the FOMC was “attentive” to the increase, adding that “persistent changes in broader financial conditions can have implications for the path of monetary policy.”

● Policy outlook: Based on the Fed’s latest stand and market’s general view, we expect that the FOMC will remain on hold through most of 1H of 2024, which is consistent with market pricing.

● Bank Negara Malaysia (BNM) Policy Outlook. We expect no change to the overnight policy rate (OPR) even in the face of mounting pressures for further tightening due in part to the weakening ringgit. Hence, we expect BNM to maintain the OPR at 3.00% at its Monetary Policy Committee meeting later today. Expectation of a slower economic growth and a relatively tamed inflation would generally be a good reason enough for BNM to maintain its monetary policy stance even well into next year

Source: Kenanga Research - 2 Nov 2023