US Fed raised rates by 25 basis points

Transcription

1 Dr. Mohd Afzanizam Abdul Rashid Chief Economist US Fed raised rates by 25 basis points Facts The US Federal Open Market Committee (FOMC) meeting last night concluded with a 25 basis points hike. The Federal Fund Rate (FFR) has now moved from 0.75%-1.00% to 1.00%-1.25%. The decision was highly anticipated by the market as the economy continues to stage a healthy growth amidst improvement in the labour market. Despite that, it was not a unanimous decision as one of the member, Neel Kashkari, prefers to maintain the prevailing rate. There was a clear indication by the Fed to trim its bloated balance sheet which currently stands at USD4.46 trillion as of 7 June. Beginning this year, the Fed has mapped out its strategy to reduce its balance sheet size dubbed as Policy Normalization Principles and Plans. Under this policy, the Fed will reduce the reinvestment of the principal payments it receives from securities held in the System Open Market Account. Additionally, the Fed will ensure the reserve balance to remain sufficient to support the economic activities as this policy will intermittently reduce the level of liquidity in the system. The Fed also shares their latest economic projection. The 2017 GDP growth projection (median) has been revised from 2.1% to 2.2% and unemployment rate was scaled down further from 4.5% to 4.3%. While growth is anticipated to be better this year, inflation rate is envisaged to be lower from 1.9% to 1.6% in 2017 based on PCE inflation rate (see Appendix). The next FOMC meeting will be held on 25 and 26 July. Chart 1: Federal Fund Rate (FFR) % Jun-90 Dec-94 Jun-99 Dec-03 Jun-08 Dec-12 Jun-17 For Internal Circulation Page 1

2 Chart 2: Federal Reserve balance sheet (USD trillion) Jun-01 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Jun-13 Jun-15 Jun-17 Our view The latest decision suggests the US economy is firming up as support from the monetary policy is being gradually reduced. Clear communication on their plans to bring down the balance sheet size should steer the Treasury market in a controlled manner. This should reduce the potential shock in the bond markets. Additionally, lower inflation rate should imply that the normalisation process will be done in a steady pace. For the record, the PCE inflation rate stands at 1.7% y-o-y as of April this year, which is below than the 2% target. Therefore, another one more hike in FFR is likely. All this suggests that the economy is poised to grow with minimal interruption as a result of the monetary policy normalisation. Thus far, business and consumer sentiment have been on the rise, suggesting that aggregate demand will continue to be positive in 2017 (see Chart 3). This is good for global growth and would be supportive to Malaysia s external sector. Chart 3: ISM Manufacturing Index vs. U.Michigan Consumer Sentiment Index U.Michigan Consumer Sentiment Index 47.0 ISM for manufacturing (RHS) May-13 May-14 May-15 May-16 May-17 For Internal Circulation Page 2

3 We also believe that the ringgit is expected to appreciate further given the gradual approach adopted by the US Fed. As such, we are maintaining our call for MYR/USD of RM4.10 and RM4.20 in the 2H2017. On year-to-date basis, MYR/USD has appreciated by 5.1% to close at RM4.258 as of yesterday. Chart 4: MYR/USD vs. US dollar index (DXY) 104 DXY Curncy 102 MYR Curncy Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 For Internal Circulation Page 3

4 Appendix FOMC statement Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending has picked up in recent months, and business fixed investment has continued to expand. On a 12-month basis, inflation has declined recently and, like the measure excluding food and energy prices, is running somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Near term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely. In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained 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. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant 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. The Committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated. This program, which would gradually reduce the Federal Reserve's securities holdings by decreasing reinvestment of principal payments from those securities, is described in the accompanying addendum to the Committee's Policy Normalization Principles and Plans. Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; and Jerome H. Powell. Voting against the action was Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate. For Internal Circulation Page 4

5 Table 1: Federal Reserve economic projections Source: US Federal Reserve Board Produced and issued by BANK ISLAM MALAYSIA BERHAD (Bank Islam) for private circulation only or for distribution under circumstances permitted by applicable laws. All information, opinions and estimates contained herein have been compiled or arrived at based on sources and assumptions believed to be reliable and in good faith at the time of issue of this document. This document is for information purposes only and has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. No representation or warranty, expressed or implied is made as to its adequacy, accuracy, completeness or correctness. All opinions and the content of this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of Bank Islam as a result of using different assumptions and criteria. No part of this document may be used, reproduced, distributed or published in any form or for any purpose without Bank Islam s prior written permission For Internal Circulation Page 5