FOMC keeps interest rates close to zero

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At the Federal Open Market Committee (FOMC) meeting,  which traditionally took place over two days on  9 and 10 June, the Central Bank of the USA – the Federal Reserve System (Fed) – left the interest rate in the range of 0-0.25% p.a. assuming that the FOMC should keep the interest rate close to zero until about 2022. At the same time, the FOMC commented on the current state of the economy along with the outlook for the upcoming period.

As already mentioned the FOMC left the interest rate unchanged and a prediction of the state of the United States economy was revealed. Gross domestic product (GDP) is expected to fall by up to 6.5% this year, but next year it can be expected to grow again by about 3.5% and in 2022 it shall increase by 5%.  The Chair of the Federal Reserve, Mr. Jerome Powell, said at a press conference after the FOMC meeting that the US central bank will continue to increase bond buyouts, especially the US government bonds up to US$ 80 billion a month in total, and the Fed will also buy mortgage-backed securities worth up to US$ 40 billion a month.

The International Foreign Exchange (Forex) market reacted to this fact by the exchange value of the US dollar (USD) strengthening slightly against other major world currencies. According to the US Dollar Currency Index (DXY), on 11 June 2020, at 8:18 am, the USD was seen at a price level of 96.31, with a daily appreciation of +0.37% so far. At the same time the EUR/USD global currency pair traded at US$ 1.135 per EUR, with the daily appreciation of the USD by +0.141% against the EUR. The USD also strengthened against the British pound (GBP) by +0.51% and traded at a mutual exchange rate of US$ 1.268 per GBP. One of the few major world currencies against which the USD has not yet strengthened against is the Japanese yen (JPY), with the USD/JPY currency pair currently trading at JPY 107.06 per USD with the current daily decline of the USD by -0.028% against the JPY.

Investors have taken interest in the statement of Mr. Powell in order to figure out if the Fed will continue to maintain its current monetary policy. However, bond purchases were considered by investors to be at a critical point in their assessment, as the Fed sharply reduced its purchases in terms of the financial volume of the buyout, as purchases have ranged from a maximum of US$ 300 billion a month recently. In a separate statement, the Fed said it would maintain purchases “at least at the current pace in order to maintain the smooth functioning of the markets for these securities, thereby promoting the effective transfer of monetary policy to broader financial conditions.” Despite the slowdown the Fed’s balance sheet holds assets from these buyouts at a total financial volume of more than US$ 7.2 trillion. However, according to analysts, a more permanent decline in the exchange rate of the US dollar (USD) against other world currencies and especially against the EUR can be expected.

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