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FOMC Preview – Cautious about Economic Weakness but Fiscal Stimulus should lend Support

The FOMC meeting in the coming week will not bring any change in the monetary policy. Economic activities have moderated since the December meeting, while resurgence in the coronavirus cases could hurt economic activities more seriously than previously expected. Yet, roll-out of more fiscal stimulus and positive vaccination progress suggest that policymakers might keep the powder dry from some time. The Fed will leave the asset purchases at US$120B per month and the Fed funds rate at 0-0.25%. All forward guidance will stay unchanged.

Economic data released since the December meeting indicated a loss of momentum in the recovery process. The unemployment rate steadied at 6.7% in December. However, the number of payrolls dropped for the first time in 6 months. Retail sales gained +3.7% y/y in November, easing from +5.4% growth in the prior month. Flash reading of the Markit composite PMI dropped -2.9 points to 55.7 in Decmeber, Both manufacturing and serviced activities slowed during the month. Scheduled for release in the coming week, GDP probably expanded +4.2% q/q (annualized) in 4Q20, after a strong +33.4% growth in the prior quarter.