Fed keeps foot on pedal to ensure US recovery

  • Fed keeps foot on pedal to ensure US recoveryFed keeps foot on pedal to ensure US recovery
Share: Share to Facebook Share to Twitter Share to LinkedIn


The US Federal Reserve (Fed) in its latest Federal Open Market Committee (FOMC) on 29 July has as expected kept the key overnight interest rate (Fed Funds Target Rate or FFTR) in the target range of 0.00% to 0.25%.

The Fed Board of Governors also signaled that it is keeping its pledge to use the full range of monetary tools to support the US economy to promote “maximum employment and price stability goals.”

The US central bank said it will “increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions.”

It is also extending its dollar liquidity swap lines and the overnight repurchase (repo) agreement facility for foreign and international monetary authorities through 31 March 2021. Fed chair Jerome Powell said it would leave the swap lines in place until it is confident they are no longer needed.

The FOMC statement also noted that while economic activity and employment have picked up somewhat in recent months, it “remains well below their levels at the beginning of the year” adding that “the path of the economy will depend significantly on the course of the virus.”

While that puts the US economic recovery squarely on the ability of the US to contain the spread of the coronavirus (COVID-19), the message from the latest FOMC is clear – It is committed to do whatever it takes to maintain financial market stability and guide the US economy back to recovery.

The Board of Governors had earlier also decided to extend several emergency loan programmes which were set to expire on 30 September 2020 until end-2020 to provide certainty and help the economy recover from the COVID-19 pandemic.

Mr Powell had reiterated during his press conference that the central bank remains committed to using its tools "for as long as it takes" and repeating his previous message that the Fed is not even "thinking about raising rates” and will not cut back on its emergency facilities for "a very long time" as the path forward for the economy is "extraordinarily uncertain" due to the impact of rising virus case counts on economic activities. He stressed again the need for additional fiscal support from Washington as earlier fiscal actions by Congress had helped to prop up the economy.


We expect the Fed to keep its near zero percent policy rate until at least 2022 but is unlikely to dip beyond zero into negative territory. Comments from Fed Governor Lael Brainard on the yield curve target (YCT) also indicated that the central bank is not yet done with its easing policies.

We expect the Fed to implement YCT as a means to make monetary policy even more accommodative which may be announced possibly by the next FOMC on 15/16 September 2020. We project a severe 35.2% (annualised rate) decline in the 2Q GDP after the 5% contraction in 1Q. With two quarters of contraction, it means that the US is now in a technical recession for the first half of the year.

This publication shall not be copied or disseminated, or relied upon by any person for whatever purpose. The informationherein is given on a general basis without obligation and is strictly for information only. This publication is not an offer,solicitation, recommendation or advice to buy or sell any investment product, including any collective investmentschemes or shares of companies mentioned within. Although every reasonable care has been taken to ensure theaccuracy and objectivity of the information contained in this publication, UOB Asset Management Ltd (“UOBAM”) andits employees shall not be held liable for any error, inaccuracy and/or omission, howsoever caused, or for any decisionor action taken based on views expressed or information in this publication. The information contained in this publication,including any data, projections and underlying assumptions are based upon certain assumptions, managementforecasts and analysis of information available and reflects prevailing conditions and our views as of the date of thispublication, all of which are subject to change at any time without notice. Please note that the graphs, charts, formulaeor other devices set out or referred to in this document cannot, in and of itself, be used to determine and will not assistany person in deciding which investment product to buy or sell, or when to buy or sell an investment product. UOBAMdoes not warrant the accuracy, adequacy, timeliness or completeness of the information herein for any particularpurpose, and expressly disclaims liability for any error, inaccuracy or omission. Any opinion, projection and otherforward-looking statement regarding future events or performance of, including but not limited to, countries, markets orcompanies is not necessarily indicative of, and may differ from actual events or results. Nothing in this publicationconstitutes accounting, legal, regulatory, tax or other advice. The information herein has no regard to the specificobjectives, financial situation and particular needs of any specific person. You may wish to seek advice from aprofessional or an independent financial adviser about the issues discussed herein or before investing in any investmentor insurance product. Should you choose not to seek such advice, you should consider carefully whether the investmentor insurance product in question is suitable for you.

Invest in your mind. Receive our curated insights in your inbox.