(World of Finance and Economics) What should the Fed do to maintain ultra-low interest rates in the face of "medium-term risk"?
China News Agency, Beijing, April 30 (Xia Bin) "The current public health crisis will seriously affect economic activity, employment and inflation in the short term, and pose a considerable risk to the medium-term economic prospects." There is such a paragraph in the policy statement of the latest interest rate meeting issued by the Federal Reserve.
The Fed also announced that it will keep the federal funds rate target range at an ultra-low level of zero to 0.25%.
How long will this interest rate last? The Fed said that until it is convinced that the US economy has withstood the test of recent events and is expected to achieve its maximum employment and price stability goals.
Just a few hours before the Federal Reserve announced its policy statement, the US Department of Commerce released data showing that the U.S. real GDP fell by 4.8% in the first quarter of 2020, the largest quarterly decline since 2009.
The economy has been hit hard in the short term, and the medium-term outlook is not optimistic. Regarding the judgment of the US economy, a "medium-term risk" was proposed in the policy statement. Fed Chairman Powell explained that the so-called "medium-term" refers to between "now" and "long-term", that is, "the next year or so".
Specific risks include how long it takes for the outbreak to be contained, whether there will be additional outbreaks, whether there are drugs or vaccines to treat new coronary pneumonia; the outbreak may damage the productivity of the US economy; The U.S. economy is adversely affected.
In order to support the US economy through the difficulties, the Fed promised to "use all tools", but it will not fight alone. Powell hinted that he will continue to strengthen cooperation with fiscal policy and pointed out that the Fed has the ability to lend rather than spend. The Fed does not have the right to provide funds to any beneficiary. If you want a strong recovery of the US economy, it is likely that more parties will need support, including Congress.
What should I do in the future? "Powell's remarks revealed that the Fed will spare no effort to use monetary policy tools to support the economy and cooperate with fiscal policies. In the press conference, Powell said that the Fed has many policy tools and it is necessary to do more." Zhang Yu, chief macro analyst of Huachuang Securities, said .
Zhang Yu gave the direction of the Fed's future operations. For example, the Liquidity Facilitation Facility (PPPLF) tool of the Payroll Guarantee Program will expand in the future based on demand, and the Fed will also officially launch the existing tools such as the convenience of Main Street loan liquidity. Looking to the future, it is expected that the next step will be the possibility of Fed ’s implementation of yield curve control.
Zhang Yu said that the Fed has used this tool in history, and in recent years the Bank of Japan and the Bank of Australia have also launched this tool.
She explained that by combing the historical experience of the yield curve operation, it can be seen that in order to meet the needs of national debt issuance during the crisis and when the central bank ’s bond purchase space is close to the upper limit, the operation controlled by the yield curve can be The interest rate of national debt is stabilized at an appropriate level to reduce the cost of bond issuance, and the effect of "forward guidance" reduces the scale of bond purchases required to maintain interest rate levels.
"It is necessary for the Fed to adopt the yield curve control." Zhang Yu said that first of all, it can maintain a low cost of government bond issuance; secondly, because the yield curve control has the effect of forward guidance on the future interest rate level, it may also reduce the Fed The scale of debt purchase required.
Analysts at CITIC Securities clearly stated that the current US monetary policy tools include quantitative easing, central bank currency swaps, and various liquidity arrangements for primary dealers, depository financial institutions, foreign banks, small and micro enterprises, and municipal bonds. It is expected that the follow-up to small and micro enterprises that are more severely affected by the epidemic will increase and expand liquidity arrangements.
He pointed out that in terms of asset purchase scale, the Fed's balance sheet scale has expanded significantly. Although the speed of asset purchase scale has slowed recently, it is expected that the Fed will continue to carry out asset purchases and large-scale open market operations as necessary in the future. (Finish)