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27 Apr 2020

International Economy

Fed expected to keep interest rates at 0.0-0.25% in the meeting of 28-29 April; negative rates seen as unnecessary for now (Business Brief No.3863)


         The US economy is experiencing markedly elevated risk from the spread of COVID-19. The International Monetary Fund (IMF) projects that the US economy in 2020 may contract by 5.9 percent, a decline comparable in severity to that of the Great Depression in 1930. The US economy severely contracted after the rate of COVID-19 infections spiked sharply, prompting the US authorities to issue fiscal stimulus packages with the highest limits in history. Meanwhile, the Federal Reserve (Fed) has already made two emergency rate cuts, bringing the funds rate down to a range of 0-0.25 percent, as well as issuing quantitative easing measures (QE) with no limit, to support the system's liquidity. In addition, the Fed has issued soft loans to businesses and households via various commercial banks in order to relieve the impact of the COVID-19 pandemic.

         KResearch has assessed that the Fed will keep the federal funds rate in a range of 0-0.25 percent at their upcoming monetary policy meeting on 28-29 April 2020. The need for interest rates to go below zero for the first time in US history remains low, as the Fed is keeping close watch on the pandemic and the economic conditions after the issuance of major stimulus measures. Furthermore, any decision to cut rates further would depend on the standpoint of the Fed towards the ongoing economic fallout from COVID-19 in the US. If the Fed views the situation to be manageable over the upcoming period and states are able to relax lockdown measures, the impact on the US economy would likely be limited to 2020, with a strong economic recovery expected for 2021. Therefore, implementation of negative interest rates may not be a suitable option, or one that is necessary for the present situation, as cutting interest rates to below zero would reflect the Fed's negative impression towards the US economy – which would, in turn, generate concerns within the market and badly affect the stability of the financial sector.

         ​Nonetheless, if the pandemic persists beyond the current estimates and thereby weakens the US economy even further, the Fed would be expected to issue additional QE measures based on the prior announcement of no limits – to enhance liquidity and support future economic expansion – in conjunction with a possible increase in fiscal measures.

International Economy