No sign of recovery leads to unchanged Fed rates
KUALA LUMPUR: The US’ Federal Open Market Committee (FOMC) kept its policy rate between zero to 0.25 per cent and maintained its bond buying programme, signalling the US’ intention not to pull back from their policies until signs of recovery are seen.
With the resurgence of Covid19 cases, and its negative impact on growth, FOMC chair Jerome Powell signalled they have no intention of pulling back from their policies until the job market recovers and inflation exceed two per cent for some time, reaffirming the guidance they have made since August 2020.
The Hong Leong Investment Bank Bhd research team (HLIB Research) saw that the US committee assessed that the pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic.
“Weaker demand and earlier declines in oil prices have been holding down inflation,” it reiterated in its analysis yesterday. “The statement noted that overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to households and businesses.
“The FOMC added that the path of the economy will depend significantly on the course of the virus, including progress on vaccinations. In the meantime, the Federal Reserve emphasised that the ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook.”
The Committee decided to keep the target range for the federal funds rate at zero to 0.25 per cent and expects this t be appropriate to maintain this target range until labour market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to two per cent and is on track to moderately exceed two per cent for some time.
The Fed expects real GDP to contract by 2.4 per cent year on year (y-o-y) and recover in 2021 by 4.2 per cent y-o-y. On unemployment rate, the Fed anticipates it to average to 6.7 per cent in 2020 and improve but remain high at five per cent in 2021.
On inflation, the committee is forecasting a modest growth of 1.2 per cent y-o-y in 2020, and 1.8 per cent in 2021, which is still below the Fed’s target of two per cent. Core inflation is anticipated to increase by 1.4 per cent y-o-y, and improve modestly to 1.8 per cent in 2021, and only reach two per cent in 2023.
“Almost all Fed’s policymakers foresee no rate hikes through 2023,” HLIB Research reiterated.
“In 2020 and 2021, all FOMC members expect rates to remain at this level. In 2022, all but one FOMC member anticipate rate to remain unchanged. In 2023, four FOMC members expect rates to increase while the others forecast it to remain unchanged.”
The Fed said they will continue to increase bond buying by at least US$80 billion per month of Treasury securities and at least US$40billion per month of agency mortgage backed securities until ‘substantial further progress’ has been made toward Committee’s maximum employment and price stability mandate. All voting members were in favour of this policy action.
“In the near term, against the backdrop of high Covid-19 cases and more infectious variant, US GDP growth is expected to weaken,” the research house predicted.
“In line with this, FOMC chair Powell reaffirmed their view of maximum employment as a “broad-based and inclusive goal” and the ability to achieve that objective in the years ahead depends importantly on having longer-term inflation expectations well anchored at two per cent.
“Currently, officials don’t see inflation returning to their two per cent goal until 2023.
“Consequently, we maintain our expectation for FOMC to remain accommodative for 2021. In Malaysia, while there is lower concern of tighter or prolonged movement control order, the high case count may continue to constrain mobility and demand going forward, posing downside risk to Malaysia’s GDP forecast.
“Hence, we opine that Bank Negara Malaysia may reduce the Overnight Policy Rate by another 25 basis points to 1.50 per cent within the first half of 2021.”