Dr. Mohd Afzanizam Abdul Rashid Chief Economist 03-2088 8075 afzanizam@bankislam.com.my FOMC decided to raise FFR by 25 basis points Facts The Federal Open Market Committee (FOMC) decided yesterday to raise the Federal Fund Rate (FFR) by 25 basis points to 1.75%. It was a unanimous decision by the committee. Despite that, the opening remarks in the accompanying statements suggest the FOMC members are of the view that the economy is softening on account of moderation in households and business investment spending in the 1Q2018. Consequently, the members are divided on the rate hike path for this year. Two out of 15 members expect the FFR will be left unchanged at the prevailing rate, six out of 15 members anticipate three hikes and 7 out of 15 envisioned the tightening process could go beyond three times. The FOMC statement ended with similar tone data dependant and gradualist approach. The next FOMC meeting will be held on 1 and 2 May. Judging from the interest rate futures, the markets expect that there will be no rate hike in the next meeting. Chart 1: Federal Fund Rate (FFR) % 7.00 6.50 6.00 5.00 5.25 4.00 3.00 2.00 1.75 1.00 0.00 Mar-91 Sep-95 Mar-00 Sep-04 Mar-09 Sep-13 Mar-18 Source: Bloomberg For Internal Circulation Page 1
Chart 2: FOMC s participant s assessments of appropriate monetary policy (the dot plots) Source: US Federal Reserve Our view The dot plots was a clear indication that FOMC members are divided whether to stay on course with the rate hike or perhaps, taking a long pause. High frequency indicators such as the consumer confidence and business sentiments are all pointing to a positive economic outlook. While the tax cut measures is also seen as the catalyst for a strong growth, the recent announcement on steel and aluminium import tariff could potentially be disastrous to global trade. It is still uncertain to what extent that other countries would respond. Therefore, argument between three or four rate hikes will continue to dominate the discussion on the US monetary policy. So what is the impact to Malaysia? We believe the BNM will continue to focus on domestic factors primarily the economic growth and inflation. The latest print showed that Malaysia s inflation rate stands at 1.4% y-o-y as of February this year. Therefore, Malaysia s real rate of return has already in a positive territory given that the prevailing OPR is at 3.25%. As such, BNM is in no hurry to raise the OPR this year. The other would be the currency. The USD/MYR appreciated to RM3.9080 in the early trade but has since depreciated to RM3.9100 as at 10.15am today. Against such backdrop, the USD/MYR is very fluid at this juncture. In a nutshell, it is not going to be a smooth sailing all the way. Despite that, we maintained our call that USD/MYR should lingers in the region of RM3.85 to RM3.95 this year. For Internal Circulation Page 2
Chart 3: CPI vs. OPR 10.00 8.00 6.00 CPI y-o-y OPR 4.00 2.00 0.00-2.00-4.00 Feb-05 Apr-07 Jun-09 Aug-11 Oct-13 Dec-15 Feb-18 Source: Bloomberg For Internal Circulation Page 3
Appendix FOMC statement Information received since the Federal Open Market Committee met in January indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong in recent months, and the unemployment rate has stayed low. Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but 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 economic outlook has strengthened in recent months. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up in coming months and 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 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong 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 further 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. Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams. For Internal Circulation Page 4
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