Unchanged FOMC rates within analyst expectations
KUCHING: The US’s Federal Open Market Committee (FOMC) maintained its policy rate at the existing level of zero to 0.25 per cent after the April 2021 FOMC Meeting in a move widely expected by analysts.
It also left the pace of asset purchase unchanged. The FOMC believed the US economy is strengthening on the back of easing business restrictions, falling Covid-19 infection rates, a fast vaccine rollout and continued support from the government.
“We expect their Federal Reserve to keep its policy rate at current level,” commented the team at MIDF Amanah Investment Bank Bhd (MIDF Research). “The vaccination drive, US$1.9 trillion fiscal stimulus and low interest rate environment are factors that will support the US economic recovery this year.
“We opine that easy monetary policy, in addition to fiscal support, is needed to ensure the recovery will continue as the labour market condition in particular remained below prepandemic levels.”
As the ongoing pandemic remains a major downside risk to the growth outlook, MIDF Research foresees the Fed to maintain interest rate at current low levels this year and through 2023, as indicated by the Fed’s dot plot of fed funds rate projection.
“It was within our expectation that the Fed did not make any adjustment to its asset purchases after the recent meeting, as the Fed Chair repeatedly pushed back concerns over growing inflation expectation despite market’s anticipation for the Fed to address rising bond yields.
“The Fed reiterated the need to maintain the current policy setting until the Fed see substantial improvements in the actual data for both employment and inflation towards the Fed’s long-term goals.”
Despite President Joe Biden passed a huge stimulus package in March and promised to shell out trillions more on infrastructure and American families, triggering inflationary concern in the market, Chairman Jerome Powell reiterated that more healing is needed before the Fed does anything that might dampen economic activity.
“It’s not yet time to have a conversation about tapering. Instead, inflation, it reiterates, has risen, largely “reflecting transitory factors,” he was quoted as saying.
On this point, the team with Kenanga Investment Bank Bhd (Kenanga Research) said the reality is the hole left by the Covid-19 economic shutdown was so deep and devastating that the current slew of good economic news is not enough to convince the Fed and other major central banks to wean away from their easy money policy anytime soon.
“And to make it more difficult, the pandemic is far from being defeated. Hence, we may only see the Fed to start to gradually taper its bond buying exercise somewhere next year,” it opined.
“Similarly, in Malaysia, Bank Negara Malaysia (BNM) acknowledges that an accommodative monetary policy stance will be needed through 2021 given the uneven pace of recovery and the downside risks to economic outlook.
“This is in line with our house view that BNM will keep the overnight policy rate (OPR) unchanged at 1.75 per cent for the rest of the year, particularly given the recent relaxation of Covid-19 restrictions, Malaysia’s continuing vaccination drive and the additional RM20 billion Pemerkasa stimulus package.
“Although there is still room for BNM to cut the OPR by at least 25 basis points, should Covid19 infections rise significantly hampering economic recovery, we reckon the government would give priority to implement fiscal measures and stimulus to support the economy.”