The US economy continues to experience increased risk despite recovering signs seen after Washington began easing lockdown measures
in May 2020. The US Purchasing Managers’ Index (PMI) came in at 43.1 in May, rising
over the 41.5 reported for April while unemployment slipped to 13.3 percent in
May, from the 14.7 percent recorded in April. Consumer spending and domestic
travel have exhibited signs of recovery, too. Nevertheless, heightened risk is
seen in the US economy because the relaxation of lockdown measures amid high
number of new COVID-19 infections will likely spur a second wave of the
pandemic. This coupled with domestic unrests may accelerate the COVID-19
transmission rate. The US economy is also bracing for risks stemming from political
problems in the country, and the renewed trade war. It is expected that such
factors will determine the directions of the US economy and Fed’s policies,
going forward. KResearch has assessed
that the Fed will maintain its policy rate at 0.0-0.25 percent during the
upcoming monetary policy meeting scheduled for June 9-10, 2020. The Fed is not
in dire need to push the Fed Funds rate to below zero or pursue yield curve
control at this time as such policies may not only cause
jitters in the market, but also affect stability in the financial sector. In
addition, such policies been proven to be ineffective in shoring up economies
in many countries struggling with deflation.
These policies, therefore, may not be suitable options for the US under
the current circumstances. However, if the US economic performance deteriorates
further, it is likely that the Fed will pursue a negative interest rate policy.
Meanwhile, the upcoming FOMC meeting is scheduled to release its economic
forecast and Fed Dot Plot, as well. We at KResearch view that the Fed
may maintain a cautious stance towards the US economic performance, and expect
that the Fed will keep its policy rate steady over the near term while
continuing its quantitative easing (QE) until significant changes are seen in key
US economic indicators.
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