US FOMC Meeting - No rate changes but lacks hawkish tone
Thu, 2 Feb 2017, 09:53 AM
OVERVIEW
- Federal fund rate unchanged for now. In an unananimous vote, the Federal Open Market Committee voted to maintain the Federal Fund Rate range at 0.50-0.75%.
- Upbeat but vague. While the tone was somewhat upbeat, the Fed offered little hint on the next rate rise besides noting that core PCE growth remains below its targeted 2.0%.
- Ringgit forecast unchanged. Given that the February FOMC meets our expectations of no premature rate hikes, we reiterate our ringgit forecast at USD4.40-4.50 though we expect the ringgit likely to trade at the lower end of the forecasted range, at least in the short term.
Feds move within expectations. The FOMC’s move to maintain the Federal Fund Rate range falls within the expectations at 0.5- 0.75%. The vote was unanimous. The Federal fund futures implied a 85.5% probability of rates being maintained as at Tuesday (31 Jan) with a cumulative 32.9% rate hike probability in the FOMC’s March meeting. Notwithstanding its decision, the Fed painted a relatively optimistic picture of household spending, and consumer and business sentiments though it notes that business fixed investments remain soft and measures of inflation compensation and longer-term inflation expectation remains low, below the committee’s 2.0% target. In the Fed’s December meeting, it previously noted that “market based measures of inflation compensation have moved up considerably but remained low”.
Little guidance on next rate hike. Though the FOMC surprised no one by holding policy steady this month, it may have surprised a few by not dropping any particular hawkish language into the policy statement. The Fed’s statement offers little signs on the timing and magnitude of its next rate hike though the statement hints that the Fed would like to see a more marked change in inflation expectation before any shifts in the target range. For now, markets are pricing in only about a one-in-three chance of a move at the March meeting. If the committee members are thinking about hiking then, they should have dropped a stronger hint
OUTLOOK
Translating confidence to reality. Sentiments have largely been upbeat though there are several hotspots that will likely be monitored by the Feds pending their next rate hike. While the PCE price index edged 1.6% up YoY in December (November: 1.4%), the Fed appears to hint that the next anticipated hike will be influenced by actual movements in the Core PCE price index which remained unchanged at 1.7%, stubbornly below the Fed’s target of 2.0%. We also note that the Fed’s labour market conditions index also fell 0.3% in December after rising 2.1% in November, raising the possibility of a less upbeat jobs market. We believe that any changes in the target range will be guided by improvements in the labour market conditions index.
Topsy turvy Trump. We reckon Yellen and team may not want to be in President Trump’s bad books, and thus the reluctance to dial up its hawkish tone. Rates remains too low for the US economy and with the expansion nearing nine years old, the Fed tightening cycle, we believe, has barely budged. We think time is not on Fed’s side especially when rates has been low for so long that the institution is at risk from those in Congress and the administration who would like to rewrite its mandate and governance.
Feds to digest more data. This implies that the Fed would likely take its time to digest further economic data leading up to its next meeting mid-March. Of salient importance are the inflation indicators (particularly the core PCE inflation figures) and labour market data (especially the nonfarm employment data coming out this Friday, along with its labour market conditions index). However, notwithstanding the data, a rate hike is likely to manifest only in its mid-June meeting, coinciding with the release of its second Summary of Economic Projections for the year.
Reiterate ringgit and OPR outlook. Given that the February FOMC meets our expectations of no premature rate hikes, we reiterate our ringgit forecast at USD4.40-4.50. In light of budding weaknesses in the US dollar as Trump protectionist talks have rattled markets somewhat, we do see some upside bias for the ringgit and expect the ringgit likely to trade at the lower end of the forecasted range, at least in the short term. Meanwhile, in the absence of heightened downside risk from external and domestic environment we reiterate our no change on BNM’s Overnight Policy Rate, at least in 1H17.
Source: Kenanga Research - 2 Feb 2017