Prolonged Pandemic... Central Banks Worldwide Grapple with Challenges

Low Expectations for Economic Recovery Amid Prolonged COVID-19... Limited Policy Options

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] As the global economy struggles to find direction following the COVID-19 pandemic, major central banks including the U.S. Federal Reserve (Fed) are facing deep concerns. This is because the lowered expectations for economic recovery limit the policy options available.

According to Bloomberg and other sources on the 28th (local time), the Fed, which is holding the Federal Open Market Committee (FOMC) meeting over two days starting today, is expected to produce no new policy measures. The Fed has already lowered the benchmark interest rate to near zero and engaged in large-scale asset purchases. Therefore, it is predicted that this FOMC will only provide guidance by strongly expressing its commitment to policy support through its statement.

Bill Callahan, an investment strategist at UK-based asset management firm Schroders, told CNBC, "The market continues to expect ultra-loose monetary policy from the Fed, and the Fed will not disappoint these expectations at this meeting." He added, "Considering that we are still at the center of the COVID-19 pandemic, the only question investors have is how accommodative the Fed will be."

Since March, central banks have rapidly lowered benchmark interest rates and actively engaged in asset purchases, deploying most monetary policy tools. Market liquidity has increased sharply, and for now, financial market crises such as credit crunches have not occurred. However, concerns about the resurgence of COVID-19 in the U.S., Europe, Japan, and other parts of the world have dampened hopes for a V-shaped recovery, and central banks are contemplating their next moves. Unlike in March, the financial market conditions?including unemployment rates, inflation, and exchange rates?have changed significantly, increasing the factors to consider.

The likelihood of an immediate additional interest rate cut is low. Until last month, there were market forecasts that the Fed and the Bank of England (BOE) might introduce negative interest rates. However, due to growing concerns about side effects, this possibility is now considered low. The People's Bank of China also kept the Loan Prime Rate (LPR), which effectively serves as the benchmark interest rate, unchanged for three consecutive months as of the 20th. While this is seen as a sign that China’s economy is recovering and thus rates were not lowered, some believe that the liquidity injected into the market flowing into real estate and other sectors, creating asset bubbles, influenced this decision.

Besides interest rates, other policies such as asset purchases and yield curve control (YCC) are being continuously reviewed, with a high possibility of introduction or adjustment. The European Central Bank (ECB) and the Bank of Japan (BOJ), both currently with negative interest rates, are closely monitoring the situation while adjusting the scale of asset purchases. The Fed has announced that it is considering YCC, which limits the upper bound of long-term government bond yields, leading to expectations that it may be introduced in the second half of the year.

This content was produced with the assistance of AI translation services.