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15 Sep 2020

Econ Digest

The Fed is expected to hold its policy rate steady at 0.0-0.25% at its September 15-16 meeting after the adoption of an average inflation target of 2%

KResearch expects that the Federal Reserve (Fed) will maintain its policy rate at 0.0-0.25% at its meeting during September 15-16, 2020, as the Fed has adopted various necessary tools to sustain the US economy, including cutting interest rates to near zero along with continuing its quantitative easing (QE) policy. Most recently, the Fed has unanimously approved a shift to average inflation targeting policy to increase the flexibility of monetary policy. This was so that the Fed will not have to rush to raise interest rates to keep inflation at a 2% target, which is a forward guidance measure to adjust market forecasting to meet the Fed’s needs. The Fed tends to keep interest rates low for a longer period of time, although this may not be directly effective in stimulating the economy in short term. Rather, it is a signal that the Fed will continue easing monetary policy to support long-term economic growth in the US. It is expected that the Fed will not signal a worsening economic outlook, in order to build confidence prior to the US presidential election held in November 2020.

 

The latest US economic figures indicate that the US economy began to lose momentum in its recovery, as new orders and production grew at a slower pace in August, while many companies have moved from temporary layoffs to permanent job cuts amidst weak demand. However, the Fed is not yet likely to adopt a yield curve control, while the negative interest rate policy is not an option that will be chosen by the Fed under the current situation, as such policy may cause volatility in the financial markets. In addition, the Fed may continue to focus on maintaining interest rates near zero and continue quantitative easing in coordination with the fiscal policy to sustain the US economy to get through this crisis.  

 

The impact of the monetary policies of the Fed and other major central banks on Thailand may be transmitted through the movement of the US dollar. Therefore, other factors that will affect the direction of currency must be monitored, such as the second wave of the COVID-19 pandemic, especially prior winter season, US political issues, geopolitical conflicts and the uncertainty of Brexit issues. Meanwhile, it is also necessary to monitor Thailand’s economic conditions and political situation, which may affect the direction of the baht amid the continually highly volatile risks. This will affect Thai exports and the implementation of Thai monetary policy in the future.

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Econ Digest