Global economies prepare to face severe contraction in growth

One of the unique features of the current order of things is the proactive central bank initiatives to mitigate the financial distress in the economy and the markets. Central banks across the world resorted to use of non-conventional methods to combat this invisible yet powerful enemy. The most common and distinguishable feature of central bank activity has been the way they have been influencing the yield curve and the term structure of interest rates, by infusion of liquidity as well as by switches between maturities on the yield curve, and also actions like selling the short end and buying the long end and vice versa. It is through the specific and targeted yield curve modifications that central banks have been giving effect to their policies. This is an interesting scenario, and it is also much-evolved central banking from the days of Beckhart.

On January 9, 2020, the Fed view was like this – “The U.S. economy begins the year 2020 in a good place. The unemployment rate is at a 50-year low, inflation is close to our 2 percent objective, gross domestic product growth is solid, and the Federal Open Market Committee’s (FOMC) baseline outlook is for a continuation of this performance in 2020.” But the pandemic and the lockdown changed all this very soon. The Fed on June 10, 2020 kept the policy rate unchanged at near zero, and they also underlined the resolution to keep the rates at low levels for a prolonged period of time to support growth and stability. The Fed has also clearly indicated that economic growth will remain weak and inflation may pick up over the next one or two years. The Fed expects the unemployment rate for 2020 to be at 9.30%, and it may come down to 5.50% in 2022. This is far above the 3.50%. That would be well above the level they expect to prevail over the longer run in a healthy economy and far above the historically low jobless rates that preceded the virus. Fed Chairman says that the speed of recovery remains “extraordinarily uncertain”, and that the Fed’s immediate target would be to prevent any “lasting damage” to the economy.

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