As widely expected, the Fed’s FOMC decided after its first policy meeting this year to hike the fed funds rate (FFR) by 25bps to 4.50–4.75%, and reiterates its commitment to continue raising rates as inflation remains above the Fed’s long-run 2% target. While the Fed will continue to shrink its balance sheet, the smaller rate hike was deemed appropriate as recent data shows inflation slowing down, but Fed Chair Jerome Powell described the current disinflationary trend as still at an early stage. Following the latest decision, Fed has raised FFR cumulatively by 450bps over the past year, with the size of the Fed’s balance sheet declining further to USD8.47 trillion i.e. total reduction of USD494.9b from the peak in mid-April 2022.
No change to the growth forecast, still expects low growth and no recession. Despite economic data pointing towards slowing growth, with the US GDP growth weakened last year, Chair Powell stressed at the press conference that the FOMC’s forecast remains the same and will only be updated at the next meeting in Mar-22. In contrast to the market’s view, Powell highlighted that the FOMC forecasts the US economy will experience below-trend growth, still positive but subdued, and will be able to avert recession because demand will not collapse significantly given the strength in the economy and job market. On another note, the Fed no longer thinks Covid19 infections pose significant risks to the US economy.
Local research house, MIDF expects FFR to be raised to 5.00% this year. As inflation remained elevated and Fed remains committed to pushing its policy rate to be more restrictive, the house expects the fed funds rate to be raised further towards 5.00% at the next FOMC meeting. Easing inflation will boost confidence and positive wage growth on the back of a tight job
market will allow for more hikes to contain overall demand pressures. MIDf forecasts the US economy would experience a soft landing driven by consumer spending, which continued to grow in 4QCY22 even after aggressive rate hikes last year.
Reading from the Fed’s forecast, inflation remains the Fed’s main focus which will be contained and move towards 2% target at the expense of economic growth and also require adjustment in the US labour market. If the effect of policy tightening is more significant, i.e. demand would fall sharper later this year, MIDF opines Fed will eventually consider easing its monetary policy to support the economy.
