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.
The
aforementioned adjustment has
revitalized the US capital market amid market confidence
that the Fed will continue its easing policies. With the US economy still
facing high risks, liquidity injected into the economic system tends to flow
primarily to the capital market, while the real sector of the economy may not
benefit much from the added liquidity. The stock market rally should also have a positive
political effect on President Donald Trump ahead of the November presidential
election. Nonetheless, looking ahead, if the Fed
resorts to continued cash injection as a means of keeping the system's interest
rates low, it may backfire and act as catalyst for higher inflation in the
future, eventually forcing the Fed to raise interest rates. This could trigger
a massive sell-off in the capital market, like the Fed’s exit strategy in
2015-2016, and could give rise to many issues down the line. Specifically, in
late 2015, after having maintained interest rates at near zero for almost 10
years, the Fed raised interest rates when the capital market underwent a
downward adjustment amid heightened volatility after the Fed signaled an
impending rate hike.
The impact of such policy on
the Thai economy is expected to primarily affect the Baht’s value, as the longer
the Fed keeps US interest rates low, the more the US Dollar will tend to
depreciate and the Baht will tend to appreciate, posing challenges for the
implementation of Thai monetary policy and the future recovery of the Thai
economy.
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