21.05.202009:22 Forex Analysis & Reviews: The results of the FOMC meeting

The Fed reaffirmed its promise to keep interest rates at zero, until they are sure that the US economy is recovering. This will presumably continue for several years, not even considering negative rates.

Although many are expecting a huge possibility of new outbreaks, the minutes of the FOMC meeting said that the central bank is ready to use emergency powers to support the economy in such a situation.

With regards to open market operations, the bank acquired a very large number of Treasury and Agency Mortgage-Backed Securities (MBS) since mid-March, just so it could ensure the smooth functioning of the markets. When economic indicators began to improve, the bank reduced the volume of purchases of securities.

Market conditions have improved in recent weeks. The intense pressure, which arose on a number of short-term financing markets in March, has eased.

A unanimous vote was taken by the committee in favor of the resumption of mutual currency agreements with the Banks of Canada and Mexico, which are linked to the Fed's participation in the 1994 North American Agreement. A unanimous vote was also taken in favor of the renewal of agreements on liquidity swap of foreign currencies and USD involving the Banks of Canada, England, Japan, the ECB and the Swiss National Bank.

The stability of the financial system during the outbreak was also evaluated. The banking sector, which includes large banks, turn out to be stable during this period. They were able to meet the growing demand for loans, all while creating reserves in case of loan loss, so that it could absorb higher expected defaults.

The Fed's actions to increase liquidity, as well as the reopening of key markets, significantly reduced these pressures.

The extraordinary uncertainty and significant risks to economic activity due to the two months of quarantine will soon manifest. The minutes discussed several alternative scenarios that could happen in the medium term, in relation to the behavior of economic activity, which seem to be equally likely.

The risk-free scenario assumes that in the second quarter of this year, US GDP will shrink sharply, and unemployment will rise sharply. Significant fiscal policies and monetary policy support will be used to help alleviate the deterioration of economic conditions and accelerate recovery.

Meanwhile, the alternative forecasts say that in the second half of the year, GDP will increase substantially, and unemployment rate will drop markedly. A full recovery is expected at the end of the year. In terms of inflation, the index will weaken, reflecting deterioration in both resource use and energy prices. According to initial assumptions, economic conditions are projected to continue to improve, and inflation will rise over the next two years.

In the risk scenario, a new outbreak and new restrictive measures will lead to a decrease in US GDP, as well as increase in unemployment by the end of the year. Pressure on inflation will renew the next year.