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24 Jul 2020

International Economy

Fed expected to maintain interest rate at 0.0-0.25% at meeting on Jul. 28-29 – present situation still does not warrant issuance of additional policy measures (Business Brief No.3878)

             KResearch projects that the Fed will continue to maintain the interest rate at 0.0-0.25 percent at its upcoming monetary policy meeting on July 28-29, 2020. The measures that have already been taken should be sufficient to sustain the US economy, which is weakening and will likely take a long time to achieve recovery.

               If the US economy begins to exhibit signs of further decline for a period that is longer than expected, the Fed still holds the option of issuing additional measures. KResearch views that there is a possibility that the Fed may enforce yield curve control, while avoiding a negative interest rate policy until such a move is deemed necessary. The yield curve control policy is set to help the Fed maintain bond yields at a low level for the foreseeable future. The Fed has no need to buy too many assets as it could affect fiscal sustainability; the central bank's purchases of government bonds mean that the government creates more debts via the bond issued. Nonetheless, yields of both short- and long-term bonds remain low at present. With indications that the Fed does not plan to raise its policy rate in the near future, there is still no need for the adoption of a yield curve control policy, not to mention its potential drawbacks. For instance, the market might be misled into forecasting higher interest rates in the future – which would conflict with the Fed's intended signal. Such action could also cause distortion of the price mechanism in the bond market. Meanwhile, the effectiveness of yield curve control policy remains to be seen in countries that have adopted this approach like Japan and Australia. Hence, the Fed must thoroughly consider the implications of such a measure before its implementation.

            ​In summary, while the Fed has leeway to maneuver additional monetary policy, its effectiveness will continue to decrease and may cause the incremental cost to be greater than the actual benefit. For this reason, the Fed must first undertake careful consideration of the current economic issues which have stemmed mainly from the COVID-19 pandemic that has yet to ease. Issuance of additional monetary measures may not directly address the problem or give the economy as much of a boost as they should.



International Economy

Fed