KUCHING: The US Federal Reserve (US Fed) decided to keep its federal funds rate (FFR) unchanged between 2.25 to 2.50 per cent in the latest January meeting, leading analysts in Malaysia to predict for Bank Negara Malaysia (BNM) to maintain its accommodative monetary stance.
Affin Hwang Investment Bank Bhd (AffinHwang Capital) saw that US’ job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier last year.
Despite the positive wording on the economic outlook, the Federal Reserve also guided that inflation expectation has moved lower in recent months.
In its latest statement, the US Federal Reserve noted that they will be ‘patient’ in determining the future interest rate path in light of global economic and financial developments as well as muted inflation pressures.
Recall that the US consumer prices fell for the first time in nine months in December 2018 amid a plunge in the cost of gasoline. The core PCE, Fed’s favourite measure of inflation, was at 1.9 per cent in December 2018, lower than the 2% level seen in September 2018.
“We believe that the US Fed will remain data dependent in determining its future monetary policy path,” AffinHwang Capital said.
“However, we believe that the US Fed may not follow closely the earlier published dot plot analysis (following the December rate hike), with the possibility of raising policy rate less than three more times in 2019.
“As previously guided by Fed Chairman Jerome Powell that the central bank’s current Fed Funds rate may be “just below” neutral, we expect the Fed will likely slow down on its rate hike cycle, possibly one hike and pause into 2019.”
The Fed’s statutory mandate of fostering maximum employment and price stability is now at a balance due to the strong labour force but weakening inflation expectation, it said.
Additionally, the risk of further economic slowdown coming from the global economic and financial development, particularly due to the trade conflict between the two major economies are likely to cause the Fed to be more cautious in deciding further rate hike.
Kenanga Investment Bank Bhd (Kenanga Research) believed the Fed sounded more neutral and said it will be “patient” on future interest rate hikes in its policy statement released after the FOMC decision. This would reinforce expectations that the Fed is almost done raising interest rates.
“This suggest that in the event of a sharp economic slowdown over the course of this year the Fed would likely be cutting rates at the beginning of 2020.
“Furthermore, there seemed to be a shift in the language of its intention on adjusting rates with the removal of the reference to “further gradual increases” and including new language saying the Committee would wait to see “what future adjustments to the target range for the federal funds rate may be appropriate.”
As the US Fed beginning to sound more cautious on its outlook on the economy and a more neutral stance on its monetary policy, AffinHwang Capital believed the emerging economies’ policy bias would likely take a cautious and easy stance.
“The current environment would give more room for Bank Negara Malaysia (BNM) to adjust its short-term benchmark interest rate lower this year if need be.
“However, the chances that BNM would cut interest rate is relatively low for now given that the Fed has not indicated that it is fully out of the tightening cycle yet. In the event that the domestic economy would slow sharply, we expect BNM may not hesitate to ease its monetary policy stance.
“However, given that the growth trajectory remains sustainable and the inflationary trend relatively steady at this juncture, we expect BNM to maintain its accommodative monetary stance and the overnight policy rate at 3.25 per cent in 2019.
“We forecast this year’s GDP growth to be slightly lower at 4.7 per cent than an estimated 4.8 per cent in 2018.”
Source: Borneo Post Online