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BUSINESS

MIDF expects Fed to increase interest rate to 3.40 pct by year-end

20/06/2022 01:06 PM

KUALA LUMPUR, June 20 (Bernama) -- MIDF Amanah Investment Bank Bhd (MIDF) expects the US Federal Reserve (Fed) would increase its interest rate to 3.40 per cent by year-end.

Commenting on the latest Fed’s decision, it believes the Fed is tightening its interest rate rather than normalising it. 

MIDF said the increase was higher than the initial expectation of 1.90 per cent forecast in March 2022. 

“In 2019, the fund's rate was at 2.50 per cent. The rush in tightening the monetary policy was due to an uptick in inflation trends,” it said in its Economic Brief research note today.

On June 15, 2022, the Fed announced that it was raising the interest rate by 0.75 percentage point, bumping the federal funds rate to a target range of 1.50 to 1.75 per cent.

MIDF said both headline and core inflation surged in post-pandemic, among others, due to domestic economic reopening, supply-chain disruptions globally and elevated commodity prices.

Jobless rate in the US declined to a two-year low at 3.6 per cent in May 2022 and business confidence, as reflected in the S&P PMI readings, indicated strong optimism among the business community. 

However, it has seen moderating signals in the economy as inflation starts to bite consumption and the tightening interest rate is putting extra pressure.

For instance, the month-on-month (MoM) retail sales growth has been on a decelerating trend since January 2022 and recorded its first contraction in May 2022 at -0.3 per cent.

Besides, it said surveys on consumers showed increasing pessimism, given that Michigan consumer sentiment falling sharply to a record low of 50.2 in June 2022 and the IBD/TIPP Economic Optimism Index declining to 38.1, the lowest in more than a decade. 

In line with Fed’s projections, gross domestic product (GDP) growth in the US is predicted to grow slower than the initial forecast of +1.7 per cent versus +2.8 per cent. 

"Even with these moderating signals, we believe the Fed would remain steadfast with its tightening plan, at least returning the fund’s rate to 2019’s level.

"In particular, the most referred inflation indicator, the core personal consumption expenditure (PCE) inflation is still above the Fed’s target rate of +2.0 per cent," MIDF said.

-- BERNAMA


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