Yesterday, the Federal Reserve made an unscheduled announcement on the extension of its lending programs through 31 December which were initially scheduled to end around 30 September. In the released statement, the central bank highlighted that the extension will allow the availability of the lending programs to help out in the recovery of the economy from the pandemic. Besides, the Fed also acknowledged the benefits received from the lending programs. There was no mentioning on why this announcement was made unscheduled.
The scheduled release of the monetary policy decision will take place tomorrow at 0200 (SGT). It is without a doubt that the Fed will keep interest rate unchanged at the current range of 0-0.25% since the central bank has already mentioned previously that interest rates will remain at the current level through 2022. It will be crucial to hear what the central bank’s chief Jerome Powell has to say about the unscheduled announcement made on the extension of its lending programs.
During the previous monetary policy meeting, Powell highlighted that an economic recovery during the second half of 2020 is likely. While the major U.S. economic indicators have shown improvements as a result of the reopening of economies, there was no progress in the containment of the COVID-19 pandemic. Instead, we see a resurgence of cases in several states. To add fuel to the fire, the enhanced unemployment benefit that provides eligible Americans with $600 per week has expired recently and an extension to the benefit has still not being finalized.
At the moment, it seems like the Fed has been driven into a corner. Failing to convince the market that they have a solution to the negative impact of the pandemic may drive the dollar even lower than before. Nonetheless, one unpopular solution remains – negative interest rates. Previously, Powell has repeatedly emphasized the reluctance of adopting negative interest rates. If Powell were to give a slightest hint on the possibility of adopting negative interest rates, the U.S. dollar may very well resume its weakness against other major currencies.