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9 Sep 2020

Econ Digest

The Fed’s new monetary policy reinvigorates the Dow Jones index, but could lead to financial market turmoil in the future

The Federal Reserve (Fed) Chairman Jerome Powell announced a major adjustment to monetary policy at the Economic Policy Symposium held in Jackson Hole on August 27, 2020. The Federal Open Market Committee (FOMC) has unanimously approved a shift in Longer-Run Goals and Monetary Policy Strategy, by adopting flexible average inflation targeting instead of fixed inflation targeting, to increase the flexibility of monetary policy.

 

           The aforementioned adjustment has revitalized the US capital market amid market confidence that the Fed will continue its easing policies. With the US economy still facing high risks, liquidity injected into the economic system tends to flow primarily to the capital market, while the real sector of the economy may not benefit much from the added liquidity. The stock market rally should also have a positive political effect on President Donald Trump ahead of the November presidential election. Nonetheless, looking ahead, if the Fed resorts to continued cash injection as a means of keeping the system's interest rates low, it may backfire and act as catalyst for higher inflation in the future, eventually forcing the Fed to raise interest rates. This could trigger a massive sell-off in the capital market, like the Fed’s exit strategy in 2015-2016, and could give rise to many issues down the line. Specifically, in late 2015, after having maintained interest rates at near zero for almost 10 years, the Fed raised interest rates when the capital market underwent a downward adjustment amid heightened volatility after the Fed signaled an impending rate hike.

 

​          The impact of such policy on the Thai economy is expected to primarily affect the Baht’s value, as the longer the Fed keeps US interest rates low, the more the US Dollar will tend to depreciate and the Baht will tend to appreciate, posing challenges for the implementation of Thai monetary policy and the future recovery of the Thai economy.

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Econ Digest