The FED adjusts its target for “New monetary policy” and the impact on Thai Baht

The Federal Reserve (Fed) Chairman Jerome Powell announced a major adjustment to monetary policy at the Economic Policy Symposium held in Jackson Hole on August 27, 2020. The Federal Open Market Committee (FOMC) has unanimously approved a shift in Longer-Run Goals and Monetary Policy Strategy, by adopting flexible average inflation targeting instead of fixed inflation targeting, to increase the flexibility of monetary policy. Powell explained that when the economy begins to recover and the unemployment rate begins to decline, the Fed will not have to rush to raise interest rates to keep inflation at the 2% target, signaling that inflation could be above the 2% target at some point. This suggests that the Fed may keep interest rates low for some time until the economy and the labor market begin to fully recover. This reflects the fact that the Fed is less concerned about the acceleration of inflation if the unemployment rate falls, as inflation has remained persistently low in the U.S. in the past, despite the unemployment rate dropping to a record low. The abovementioned adjustment will be further clarified at the Fed meeting during 15-16 September 2020, while the Fed states that long-term goals and monetary policy strategy will be reviewed every 5 years to keep up with the rapidly changing economic situation.    

In the current situation where the U.S. economy is facing various risk factors, including the uncontrollable COVID-19 pandemic, tensions between the US and China, and the still uncertain domestic political situation in the U.S., KResearch expects that the US economy will not soon recover. Therefore, the Fed’s policy shift to average inflation targeting shows that the Fed will keep interest rates low over a longer period of time. The impact on the Thai economy is likely to be mainly on the value of the currency. Allowing the Fed to keep interest rates low for an extended period of time will drive the USD down even more and the Thai Baht up even more, which is another factor that will put more pressure on Thailand’s export sector. 

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