US FOMC Tampering the speed of FFR hike

Transcription

1 Dr. Mohd Afzanizam Abdul Rashid Chief Economist US FOMC Tampering the speed of FFR hike Facts The US Federal Open Market Committee (FOMC) meeting last night decided to keep the Fed Fund Rate (FFR) unchanged between 0.25% and 0.50%. The decision was not unanimous as one of the FOMC member believed that the policy rate should be increased. In the accompanying statement, the FOMC indicated that the FFR would rise gradually over time subject to the evolving economic condition such as inflation and labour market. In addition, the prevailing FFR is expected to remain lower than its long run level of 3.3% in the near term. The next FOMC meeting will be held on 26 th to 27 Th April. Chart 1: Fed Fund Rate (FFR) Mar-90 Jul-94 Nov-98 Mar-03 Jul-07 Nov-11 Mar Our view The decision was in line with the consensus estimates whereby all economists surveyed by the Bloomberg predicted the inaction by the Fed. Therefore, there is no surprise element in this meeting. However, it is quite perplexing judging from the response in the interest rate futures market. It shows that the probability of a rate cut has emerged again to the tune of 1% to 4%. Although small, it clearly suggests that the market is increasingly anxious about the evolving economic outlook. This is particularly true when the ISM Manufacturing Index continue to hover below the 50 point threshold for five consecutive months (see Chart 2). At the same time, yield curve as represented by the difference between 10-year US Treasury yield and the 3-month notes yield remained flat compared to Jun levels (see Chart 3). This is an indication that economic growth will likely to be below potential which warrants for monetary policy accommodation. Page 1

2 Chart 2: ISM Manufacturing Index (>50: Expansionary: <50 Contractionary) Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Chart 3: Yield curve (UST 10-yr yield minus UST 3M yield) Mar-14 Sep-14 Mar-15 Aug-15 Feb-16 The resultant effect was none other than the appreciation in MYR/USD which hit an intraday high of around RM today (see Chart 4). For the record, MYR appears to be the second best performing currencies after Japanese Yen (JPY), appreciating by 5.05% on year-to-date basis (JPY: 6.67%). Chart 4: MYR/USD intraday trade Despite that, a case for a rate hike was not totally off from the table and at the current juncture, the interest rate futures market is projecting a rate hike of between 25 basis points and 50 basis points which is expected to happen in September, November and December meeting. Apart from that, core PCE is gradually rising which signals that inflation rate is slowly on the rise (see Chart 5) while unemployment rate of 4.9% in February indicates that the labour market has strengthened although wage growth is still lacking. Page 2

3 As such, we are not certain as to the durability in the MYR appreciation especially when there are potential of risk-off trades following concern in China s economy as well as the extent of negative rates and quantitative easing in major economies such as in Europe and Japan. In view of this, we are still looking at a wide range of RM4.00 to RM4.50 in 2016 for MYR versus the US dollar premised on the potential risk aversion which typically results in higher demand for safe haven currencies such as USD and JPY. Chart 5: US Core PCE y-o-y% Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan Page 3

4 Appendix - US FOMC Statement (16 th March 2016) Information received since the Federal Open Market Committee met in January suggests that economic activity has been expanding at a moderate pace despite the global economic and financial developments of recent months. Household spending has been increasing at a moderate rate, and the housing sector has improved further; however, business fixed investment and net exports have been soft. A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation picked up in recent months; however, it continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. However, global economic and financial developments continue to pose risks. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to monitor inflation developments closely. Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation. In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent. Page 4

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