Today is the day for Federal Open Market Committee Meeting

After the great devastation in the first half of the year, the second wave of novel coronavirus (Covid-19) outbreak in the United States, the world’s largest economy, may force the Fed to implement additional economic and financial measures. Hence, the markets are focused on the decision that will come out from the Federal Open Market Committee (FOMC) meeting, which will start today and last for 2 days.

Aggressive Policy Responses were given

After the novel coronavirus was identified in the United States in January, economic activity was minimized as a result of drastic measures implemented by the public authority to limit the outbreak. In an effort to ease the strong downward pressures on the world’s largest economy due to the outbreak, the Fed used aggressive monetary policies, taking its federal funding target to the range of 0 – 0.25 percent in its extraordinary meetings, and the Fed also lifted the asset purchase limits. During this period, the program Fed started the programs for the financial crisis, and established temporary swap lines with other central banks. The Bank also announced a program worth 2.3 trillion USD for small and medium-sized businesses and state and local governments, then expanded this facility. However, despite a series of policy measures the Fed took in addition to its monetary expansion, the U.S. economy couldn’t avoid shrinking by 5.0 percent in the first quarter of the year.

Economic activities were also reopened in May and restrictive policies imposed by the public authorities for a significant part of the first half of the year were lifted after the outbreak was taken under control. However, the number of unemployed people exceeded 40 million due to the fact that the manufacturing industry and non-manufacturing (service, construction) activities were partially closed in this period, and as a result of the loss of income and household consumption behavior’s deterioration, the consumer price index declined to 0.1 percent on an annual basis due to the disinflationary pressures.

In the period in question, the Fed reduced the policy rate to 0 percent in order to provide uninterrupted and low-cost cash flows that households and businesses need. Expanding its credit supply through monetary and financial applications, the Fed did not take any additional measures at the FOMC meetings held on April 29 and June 10 to observe the economic activities’ responses to the policy responses taken against Covid-19. At the press conferences following the Bank’s decisions, FED President Jerome Powell said that they are committed to using all monetary policy instruments to support the economy. He frequently stated that they are considering keeping interest rates at this level until they are confident that the economy survived the latest events and entered the path of achieving maximum employment and price stability. He also said the Committee was ready to adjust bond purchases if necessary, noting that yield curve control would also be on the agenda at the coming meetings.

FED May Continue to Monitor the Responses to Economic Activity

In addition to the monetary measures implemented by the FED, it can be said that the financial authority was effective in supporting the households and businesses by going to a large budget expansion, especially through the direct transfer method. With the strengthening of the recovery in June, the disinflationary pressure on the CPI decreased and after the increase in the activities of the sectors that form the building blocks of the economy, the number of jobless people started to decline. Considering these factors, we believe that Fed will continue to monitor the effects of the responses it gave against the coronavirus crisis and that it will maintain its stability in its supportive stance and follow the responses of economic activities and the inflation outlook. In this context, after a 2-day policy meeting, we expect the Committee to evaluate all variables related to the outlook for the US economy and not to change the current interest rates and asset purchase program in its decision that will be announced tomorrow at 20:00 (GMT+2).

Fed Chairman will hold a press conference at 20:30 (GMT+2) after the decision was taken. And market participants will closely follow his verbal guidance, the Committee’s approach to the downside risks posed by the second wave, and the signs of yield curve control, which was left as an open question and necessary in order to make the growing debt burden manageable.