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
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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