This is an extremely difficult and crucial time for every country, but in particular for the US. The role and every decision of the Fed are immensely important for the American and global economy. This is why officials are constantly meeting so to be regularly updated and informed about the situation and, moreover, decide which solutions are needed to best address the problems brought by the pandemic.
Due to the high pressure from the market, the Fed has already undertaken, at the beginning of March, various emergency measures in order to offset the sudden decline of the American economy. Some of the main important decisions include: slashing interest rates, reviving large-scale asset purchases and pumping up liquidity into multiple financial markets by raising facilities.
This has given an important message: the US central bank was prepared to pull out all the stops to prevent an economic depression and is going to do whatever is necessary to solve the crisis.
However, what was done two months ago might not be enough for everyone. In fact, some financial investors would like to have a deeper knowledge about this extraordinary support action. In particular, they would like to see a clearer path of interest rates and a deeper explanation about the duration of asset purchases. As a result, this week Federal Reserve officials and the chairman, Jerome Powell, are going to have two or more gatherings to discuss it.
The debate will concentrate mostly on whether or not to offer or not a greater leadership to the US central bank’s policies during this coronavirus pandemic.
Nothing is known yet, but there are already many rumors circulating. According to many economists, US central bankers are likely to be cautious and therefore the chances of any other major moves being taken later this week are virtually zero. We are in an economic environment that is already particularly uncertain, and any new commitments might limit or even decrease the flexibility of the economy, this is what the Fed is trying to avoid not to achieve.
For the moment, Mr Powell can consider himself to have been extremely successful at calming markets. In fact, the high volatility that was characterizing every sector of the market since the outbreak is not so blatantly clear anymore. It is still possible that the Fed will make some adjustments on its credit facilities and offer a more detailed assessment. However it is unlikely to have other strong monetary policy decisions.
Due to the high pressure from the market, the Fed has already undertaken, at the beginning of March, various emergency measures in order to offset the sudden decline of the American economy. Some of the main important decisions include: slashing interest rates, reviving large-scale asset purchases and pumping up liquidity into multiple financial markets by raising facilities.
This has given an important message: the US central bank was prepared to pull out all the stops to prevent an economic depression and is going to do whatever is necessary to solve the crisis.
However, what was done two months ago might not be enough for everyone. In fact, some financial investors would like to have a deeper knowledge about this extraordinary support action. In particular, they would like to see a clearer path of interest rates and a deeper explanation about the duration of asset purchases. As a result, this week Federal Reserve officials and the chairman, Jerome Powell, are going to have two or more gatherings to discuss it.
The debate will concentrate mostly on whether or not to offer or not a greater leadership to the US central bank’s policies during this coronavirus pandemic.
Nothing is known yet, but there are already many rumors circulating. According to many economists, US central bankers are likely to be cautious and therefore the chances of any other major moves being taken later this week are virtually zero. We are in an economic environment that is already particularly uncertain, and any new commitments might limit or even decrease the flexibility of the economy, this is what the Fed is trying to avoid not to achieve.
For the moment, Mr Powell can consider himself to have been extremely successful at calming markets. In fact, the high volatility that was characterizing every sector of the market since the outbreak is not so blatantly clear anymore. It is still possible that the Fed will make some adjustments on its credit facilities and offer a more detailed assessment. However it is unlikely to have other strong monetary policy decisions.
As it can be seen from this picture, Fed’s Balance Sheet has increased substantially since the beginning of the year and there might be the possibility of a further expansion.
It can be imagined that global shocks, like the one that we are facing, if not stopped, have enormous consequences that can completely destroy the economy. Every national institution is trying to find possible solutions to exit or limit the damage using different tools. For example, the ECB has already implemented different measures, the Union has raised 750bn euro in order to help its members. There is also the possibility of an OMT; this is an unconventional procedure for extreme situation, it was established in 2012 but never put into place. In March, the FOMC (Federal Open Market Committee) said that it would keep interest rates close to zero until it was necessary, the main goal is being price stability and a lower unemployment rate.
As a consequence, US citizens are expecting a forward guidance by the Fed, with some officials already musing about the introduction of new measures or balance sheet changes. The pressure that the Central bank is facing regards the demand to keep the American interest rates at zero. This measure would be in place until unemployment rate is back to 4 per cent and inflation is stabilized to previous level. This policy might be possible with a generous quantitative easing program that will generate an additional support to the market. However, no one is expecting the Federal Reserve to implement this plan and measures in the next meetings, but it might take into consideration to do it as soon as possible.
It is important to underline that every anticipatory action has a strong power, precede possible future market rates’ changes would help to prevent deflation : this is a measure that the Fed should consider and not under valuate, it is even more complicate to face drawbacks.
In conclusion, the Federal Reserve is a complex and organized banking system, every decision will be focus on the national needs and will be perfectly studied. In these days the Central bank is debating on what to do, and we will see how Fed officials decide to react. However, we can be sure that everyone has the same goal: exit from this crisis in the best possible way hurting the financial system and the economy the least possible.
Laura Garzino
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It can be imagined that global shocks, like the one that we are facing, if not stopped, have enormous consequences that can completely destroy the economy. Every national institution is trying to find possible solutions to exit or limit the damage using different tools. For example, the ECB has already implemented different measures, the Union has raised 750bn euro in order to help its members. There is also the possibility of an OMT; this is an unconventional procedure for extreme situation, it was established in 2012 but never put into place. In March, the FOMC (Federal Open Market Committee) said that it would keep interest rates close to zero until it was necessary, the main goal is being price stability and a lower unemployment rate.
As a consequence, US citizens are expecting a forward guidance by the Fed, with some officials already musing about the introduction of new measures or balance sheet changes. The pressure that the Central bank is facing regards the demand to keep the American interest rates at zero. This measure would be in place until unemployment rate is back to 4 per cent and inflation is stabilized to previous level. This policy might be possible with a generous quantitative easing program that will generate an additional support to the market. However, no one is expecting the Federal Reserve to implement this plan and measures in the next meetings, but it might take into consideration to do it as soon as possible.
It is important to underline that every anticipatory action has a strong power, precede possible future market rates’ changes would help to prevent deflation : this is a measure that the Fed should consider and not under valuate, it is even more complicate to face drawbacks.
In conclusion, the Federal Reserve is a complex and organized banking system, every decision will be focus on the national needs and will be perfectly studied. In these days the Central bank is debating on what to do, and we will see how Fed officials decide to react. However, we can be sure that everyone has the same goal: exit from this crisis in the best possible way hurting the financial system and the economy the least possible.
Laura Garzino
Want to keep up with our most recent articles? Subscribe to our weekly newsletter here.