KResearch assesses that the Federal Reserve (Fed) will likely keep its policy rate steady at 0.0-0.25 percent at the upcoming Federal Open Market Committee (FOMC) meeting, July 27-28, 2021, as the US labor market has yet to fully bounce back, and the number of unemployed remains substainally higher than pre-COVID-19 levels. Although the Fed is facing increased inflationary pressure, it is expected that it will give more weight to the economic recovery and maintain its accommodative monetary stance until at least the end of 2021. Additionally, the US economy is experiencing increased risks, stemming from the fast spreading 'Delta' COVID-19 variant, which has been causing the number of daily cases in the US to rise again. There are also potential risks from other new COVID-19 variants such as 'Lambda' and 'Epsilon' while it is still uncertain that current vaccines are effective against them. Moreover, the inoculation rate in the US has begun to slow down, and this may increase the risks of the COVID-19 situation there. These factors have triggered concerns about the US economic outlook. Amid elevated risks, the Fed, therefore, may maintain its easing monetary policy to support economic recovery, going forward.
Due to the increased risks from the COVID-19 pandemic and the fact that the US economic sector has yet to flicker back to life, the Fed may remain cautious and patient towards withdrawing its expasionary monetary policy. KResearch is of the view that the Fed may begin QE tapering in early 2022 and trim its policy rates in 2023 as signaled at the FOMC meeting in June 2021. However, if risks begin to ease and the US economy shows signs of renewed strength, for instance the labor market approaches full employment, with a growth rate of roughly 4.5 percent, inflation exceeds 2.0 percent, and surging asset prices in the property market, it is expected that the Fed will exit its accommodative monetay policy and raise policy rates sooner than expected. If so, US Treasury yields are expected to rise. Consequently, Thai government bond yields and borrowing costs will increase. Meanwhile, the Thai economy is projected to rebound at a slower rate than that of the global economy, including the US, owing to increased risks of the COVID-19 pandemic. These issues present a challenge for the Bank of Thailand in considering appropriate measures to maintain economic stability, going foreward.