FOMC did not change interest rates

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The traditional two-day meeting of the Federal Open Market Committee (FOMC) took place on 26 and 27 January 2021 in Washington, DC. This key committee of the Central bank of the United States, which is the exclusive monetary policy maker in the US and decides on the level of bank rates, left interest rates unchanged. Along with the commitment of close to zero rates in the range of 0.00-0.25% p.a. the Central bank – Federal Reserve (Fed) said it would continue to buy bonds worth at least US$ 120 billion a month.

Based on these facts, the international foreign exchange – Forex market reacted by further strengthening the exchange value of the US national currency and especially the global commodity currency of the US dollar (USD) against major world currencies. On 28 January at 7:43 am CET, the USD exchange rate measured by the US Dollar Currency Index (DXY) was seen at the price level of 90.71 with a daily gain of +0.07%. At the same time, the single European currency, the Euro (EUR), weakened against the USD and this global currency pair traded on the Forex market at a mutual exchange rate of US$ 1.21 per EUR with the current EUR decrease off – 0.074% against the USD. A similar situation occurred in relation to the British pound (GBP), with the USD strengthening by +0.08% against the GBP and trading at a mutual exchange rate of US$ 1.368 per GBP.

As already mentioned the FOMC said short-term interest rates on short-term loans will be kept close to zero and will continue with the asset purchase program that allows the Fed to buy at least US$ 120 billion per month in assets. “The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved,” Fed Chairman Jerome Powell said at the press conference after the FOMC meeting on Wednesday, 27 January. He also added that policy will remain “very accommodative as the recovery progresses.”

This FOMC meeting, held in January, was mainly focused on helping the US economy affected by epidemiological measures to fight Covid-19. The core of the effort was to maintain a supportive policy, and the main points of discussion were the sectors of economy that are the most vulnerable to the pandemic and are most affected. “The path of the economy will depend significantly on the course of the virus, including progress on vaccinations,” said a statement from the FOMC meeting. However, financial markets have looked at whether the FOMC statement would also provide any guidance on the future of asset purchases or quantitative easing in terms of weakening the current USD exchange rate. Since the beginning of the coronavirus crisis, the Fed has expanded its holdings by more than US$ 3 trillion, bringing its balance sheet to nearly US$ 7.5 trillion. Although inflation now remains low, investors fear that the Fed could unexpectedly narrow purchases if conditions change and this is likely to lead to strong turbulence in the entire global financial environment.

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