Federal Reserve convenes as virus puts US recovery on edge

Federal Reserve Board Chairman Jerome Powell speaks at a news conference in Washington. (Reuters/File)
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Updated 27 July 2020

Federal Reserve convenes as virus puts US recovery on edge

  • Mixed indicators won’t be enough to get the rate-setting FOMC to change course after March lending rate cut

WASHINGTON: The Federal Reserve meets next week amid mixed signals on the health of the US economy, with some sectors bouncing back from the coronavirus-caused downturn and others struggling.

Retail and new home sales were among those showing growth over the last two months but the Labor Department said last week new claims for unemployment benefits had increased week-on-week after months of declines.

Analysts say the mixed indicators won’t be enough to get the rate-setting Federal Open Market Committee (FOMC) to change course, particularly not after it cut the benchmark lending rate to 0-0.25 percent in March as the pandemic hit. “We don’t expect much to come out of this particular meeting,” said Jonathan Millar, deputy chief US economist at Barclays Investment Bank.

The two-day meeting beginning Tuesday comes as cases of coronavirus surge again, particularly in the southern and western United States, raising fears that the world’s largest economy is set for a prolonged downturn.

The Fed has offered trillions of dollars of liquidity to keep markets moving amid surging unemployment and sharp drops in activity, while warning in its “beige book” survey released earlier this month of a “highly uncertain” outlook.

The central bankers will convene via teleconference as lawmakers in Washington negotiate over whether to extend parts of the $2.2 trillion CARES Act rescue package passed in March to blunt the pandemic-driven downturn.

The most recent Labor Department report on weekly unemployment claims was seized on by both Democrats and Republicans as they negotiate over aid.

Democrats pointed to the uptick in new claims as proof aid to the jobless is needed, while Republicans said declines in the four-week moving average of claims and the insured unemployment rate were evidence people are returning to work. Fed officials have repeatedly called for more fiscal support to get the country through the downturn.

Mickey Levy of Berenberg Capital Markets said the Fed Chair Jerome Powell will likely remain vague in any comments about the economy’s health at his press conference following the FOMC meeting.

“He will respond by saying the Fed is aware of the recent rise in the spreading of the pandemic and how high-frequency data suggest it is adversely affecting economic activity — and that the Fed is prepared if necessary to provide more support to the economy,” Levy said.

Inflation

Though inflation jumped 0.6 percent in June as gas prices rose, there are few expectations of it picking up pace since COVID-19 is continuing to hamper demand, even with interest rates low and liquidity plentiful.

Oxford Economics predicted the Fed may in fact link their movement of the lending rate to inflation.

“We believe the Fed is leaning toward stating it won’t lift interest rates off the effective lower bound until inflation is sustainably at or above the 2 percent target,” they said.


Turkey holds rates in surprise that sends lira to new low

Updated 22 October 2020

Turkey holds rates in surprise that sends lira to new low

ISTANBUL: Turkey’s central bank bucked expectations for a big interest rate hike on Thursday and sent the lira plunging to a record low by holding its policy rate at 10.25% and saying it had already made progress in containing inflation.
The bank, which also surprised last month when it hiked rates, said it would continue with liquidity measures to tighten money supply. It raised the uppermost rate in its corridor, the late liquidity window (LLW), to 14.75% from 13.25%. A Reuters poll of 17 economists had expected the bank to raise its key one-week repo rate by 175 basis points to address Turkey’s weak currency and double-digit inflation. Forecasts ranged from hikes of 100 to 300 bps.
The decision to leave the rate unchanged sent the lira down more than 2% to near 8 versus the dollar and prompted economists to question the central bank’s commitment to lowering inflation and its independence from the government.
“The (bank) is now back to a more unpredictable and opaque monetary policy framework. It appears as a severe miscalculation,” Per Hammarlund, chief emerging markets strategist at Swedish bank SEB.
The key policy rate remains below annual consumer price inflation, which stood at 11.75% in September, leaving real rates negative for lira depositors.
Turkey’s central bankers had surprised markets with a 200 basis point rate hike in September, the first monetary tightening in two years as it sought to rein in inflation.
Its so-called backdoor measures to rein in credit have raised the average cost of funding to 12.52% from a low of 7.34% in July. The LLW adjustment gives the bank more scope to raise funding costs.
“A significant tightening in financial conditions has been achieved, following the monetary policy and liquidity management steps taken to contain ... risks to the inflation outlook,” the bank’s monetary policy committee (MPC) said.
It said liquidity measures will carry on “until the inflation outlook displays a significant improvement.”
The lira touched a record low of 7.9845 against the dollar.
It is down 25% this year in a selloff prompted by concerns about high inflation and the central bank’s badly depleted FX reserves, and geopolitical worries including the prospect of trickier US ties under a possible Joe Biden White House.
Last month’s hike in the policy rate reversed a nearly year-long easing cycle in which it fell rapidly from 24%, where it was set in the face of a 2018 currency crisis.
“Last month the central bank took an important step to restore credibility and today’s decision seems like a step back. All this positive impact has been reversed significantly,” said Piotr Matys, senior EM FX Strategist at Rabobank.
Turkey’s economy contracted 10% in the second quarter because of the coronavirus pandemic and measures to combat it. Tensions in the Eastern Mediterranean and in the Nagorno-Karabakh conflict are also clouding the outlook.