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27 Jul 2020

Econ Digest

Fed to keep policy rate steady at 0.0-0.25% during July 28-29 meeting…and may embrace Yield Curve Control if the US economy downturn lasts longer than expected

KResearch expects that the Fed will maintain its policy rate at 0.0-0.25 percent during the Monetary Policy Committee Meeting on July 28-29, 2020, as the measures previously implemented by Fed should be sufficient to support a US economy that shows weak tendencies and will take longer to recover.

 

It is clear that the US economy is headed towards a serious recession this year in the midst of the severe and uncontrollable COVID-19 pandemic, while unemployment is the main factor is the main factor placing demand on the US economy, keeping it from a quick recovery. The International Monetary Fund (IMF) predicts that the US economy will contract by -6.6% this year and will return to a 3.9% growth next year; the financial measures and fiscal measures already implemented by the government should sustain the US economy within the IMF projection framework.

 

However, if the US economy declines further and for longer than expected, the Fed still has more options in policy-making. KResearch views that the Fed may use the Yield Curve Control policy, because this will help the Fed keep the yield on government bonds low in the near term, without the need for excessive additional asset purchase that will affect fiscal sustainability. The Fed should avoid using a negative interest rate policy unless necessary, as such policies would reflect the Fed’s negative view of the US economy, which would cause anxiety in the market and affect financial stability.


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