Fed expected to keep the “lower for longer” stance – UOB

FXStreet reports that senior Economist at UOB Group Alvin Liew assessed the latest FOMC event.

“The Federal Reserve’s July 2020 FOMC in a unanimous and widely expected decision, kept its policy Fed Funds Target rate (FFTR) at the range of 0.0% and 0.25% while the Fed Board of Governors also unanimously maintained the interest paid on excess reserves (IOER) at 0.1%.”

“One of the main changes in the July FOMC statement is the new statement ‘Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year.’… The other new addition is the statement that ‘The path of the economy will depend significantly on the course of the virus’ which puts the US economic recovery squarely dependent on the COVID-19. Other than these changes, the rest of the FOMC statement was unchanged from June.”

“In a separate announcement on Wednesday (29 Jul), the Fed extended its dollar liquidity swap lines and the temporary repurchase agreement facility for foreign and international monetary authorities through 31 March 2021. Earlier on Tuesday (28 Jul), the Fed announced its board of governors decided to extend several emergency loan programs which were set to expire on 30 September 2020 until the end of the year.”

“The message from the latest FOMC remains clear that the Fed is committed to do whatever it takes to maintain financial market stability, and safe-guard the economic recovery. This is further reinforced by the extension of swap lines (till March 2021) and several emergency loan programs (till end-2020). We expect the Fed to keep its near zero percent policy rate until at least 2022. That said, we continue to hold the view the Fed will not want to push rates beyond zero, into negative territory, a view affirmed by the June FOMC Dotplot.”

“While we expect the Fed to maintain status quo for its policy interest rate, we believe the Fed will still ease monetary policy further especially when the expectation of an ‘unprecedented’ 2Q comes to pass. The protracted review of yield curve caps/targets (YCT) ongoing since the June FOMC… We expect the Fed to implement YCT as a means to make monetary policy even more accommodative, to be announced possibly by the next FOMC on 15/16 September 2020…”.