Markets are Focused on the Decision of FOMC
In the USA, the largest economy in the world, the new risk layer on economic activities due to the novel coronavirus, as well as the weakening of the recovery and the strong depreciation of the dollar in global markets, hence, the markets are focused on the decision to be announced by the Federal Open Market Committee at 20.00 (GMT+2) tomorrow.
Slowdown in Economic Activity Recovery
With the announcement of the coronavirus as a pandemic by the World Health Organization (WHO) in the first half of the year, the Fed resorted to aggressive monetary policies in order to minimize the damage of economic destruction, as part of the harsh measures applied by the public authority to control the epidemic. In addition to pulling the federal funding target to the range of 0 – 0.25 percent with extraordinary meetings, the Fed removed asset purchase limits. Despite a series of monetary and fiscal measures taken by the Fed in addition to monetary expansion during this period, the US economy was unable to avoid shrinking by 5.0 per cent in the first quarter of the year and 32.9 per cent in the second quarter.
As a result of the loss of income and the deterioration of household consumption behavior, the Consumer Price Index (CPI) fell to 0.1 percent year-over-year, especially in May, as a result of disinflationary pressures, while the minimum level of manufacturing industry and non-manufacturing (services, construction) activities, which are the locomotive sectors of the economy, led to the number of unemployed in this period to exceed 40 million.
In addition to the Fed’s policies following the sharp contraction in the world’s largest economy, economic activity signaled a strong recovery in June, as the financial authority rolled out the largest fiscal package in the history of $ 2.3 trillion, along with various subsidies. But the 2nd wave of Covid-19, which opened its door with a rapid relaxation of measures implemented as of the 3rd quarter of the year, added a new layer of risk to the economic outlook. In addition, the economic activity aimed at recovering losses has also slowed the pace of recovery somewhat.
Following the strong recovery in May, in June-August period, the PMI data, which is a predictor of economic performance, slowed down significantly, and non-farm payrolls, the most important indicator of the labor market, slowed its monthly increase from 4.8 million to 1.4 million. In addition, the Consumer Price Index lost some momentum in August after climbing 1.0 percent with its strong rise in June and July and registered as 1.3 percent.
Signals From Jackson Hole Symposium
The Jackson Hole Economic Policy Symposium, traditionally held in August each year by the Kansas Fed in the Jackson Hole Valley in Wyoming, was held online this year due to Covid-19. Fed Chair Jerome Powell, who made statements at this event, which is quite prestigious in the field of economics, conveyed the new approach that the Fed has adopted in its monetary policy strategy. According to this approach, the new monetary policy strategy, in which employment is put ahead of inflation, will focus on a strong employment market, Powell said, noting that the Fed has made a significant change to price stability, and will target an average inflation of 2 percent.
FOMC’s Economic Forecasts will be Followed
Powell’s dovish approach to average inflation targeting clearly expresses the Fed’s desire to create inflation, but also points out that it will maintain its monetary policy stance as expansionary for a long time to support the US economy, which is struggling to recover. However, the Fed’s adoption of support for employment as a priority and the slowdown in the labor market, which is aimed at recovering its losses, raises questions about how long the Bank will maintain its expansionary stance.
The Fed’s Economic Forecasts report, which signals that inflation will fluctuate around its 2.0 percent target while supporting the labor market and that current interest rates will continue to remain low for a long time, will be an important clue to the new approach in this context.
Due to the second wave of the Covid-19, it can be clearly stated that in an environment where there are downside risks in economic activities and an effective vaccination and treatment process to reduce the epidemic is not started, no tightening is expected in the monetary policy decision of the FED. In other words, it is necessary to emphasize the importance of signs that the Fed, from which we do not expect to change current interest rates in its September monetary policy decision to continue to support economic activity, may take additional measures in the face of a loss of momentum in the labor market recovery process. Here, the verbal guidance of Chair Jerome Powell, who will hold a press conference at 20:30 (GMT+2) after the FOMC’s September decision, will be decisive. In addition, it is worth noting that how much the Fed can tolerate in line with its new approach will be critical for the course of the dollar in the face of inflationary pressures that may occur along with the dollar, which is depreciating due to the Fed’s unlimited lending.