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16 Mar 2021

International Economy

Fed to Maintain Policy Rate at 0.0-0.25%, Aimed at Supporting Economic Recovery Despite Increased Inflationary Pressure (Business Brief No.3914)

​KResearch assesses that the US Federal Reserve (Fed) will likely maintain its policy rate at 0.0-0.25 percent during the upcoming FOMC meeting that is slated for March 16-17, 2021. Although the US economy exhibits signs of recovery, it may take a while to fully bounce back, thus prompting the Fed to keep its policy rate at near zero and continue its USD120 billion per-month asset purchases, with the aim of supporting the US economic recovery. Meanwhile, the US inflation rate is set to accelerate as a US economic recovery is underway. However, as the inflation rate may not exceed 2 percent, the US central bank will unlikely withdraw its monetary stimulus measures to slow an overheated economy should it occur.

It is expected that the Fed will revise upward its 2021 growth forecast for the US economy at the upcoming FOMC meeting. Inflation will also be revised slightly higher. Moreover, the US central bank will be cautious in its communications to ensure that markets do not make projections on the Fed Funds rate hike too soon. The Fed Dot Plot does not seem to indicate the need to hike the policy rate during 2021.

In addition, although markets are of the view that the Fed may use an operation twist or yield curve control to ensure that the long-term bond yields do not increase at a fast rate, we at KResearch expect that the Fed will likely assess advantages and disadvantages of those options before implementing them. To dispel market concerns, the Fed will likely communicate with markets that the US inflation rate will remain low despite improvements seen in the US economy.

Meanwhile, the rising US bond yields have caused the Thai government bond yields to increase. This is bound to bolster borrowing costs while the Thai economy is set to pick up, albeit at a slower rate than the global and US economies. These issues represent challenges for the Bank of Thailand in monitoring economic developments and implementing appropriate measures, going forward. 

International Economy