Fed tends to keep an eye on the downside risk balance in the economy

In an environment where the economic conditions do not change compared to the previous meeting and the downside risk balance continues, FOMC is not expected to make big changes in the monetary policy. The closures caused by high Covid cases and the uncertainty of financial incentives lead to the continuation of the recession risk for large economies in this crisis environment where all kinds of action areas are used in terms of monetary incentives.

As Powell pointed out two weeks ago, in terms of the course of the economy, the Fed is not in a position to evaluate tightening. During this crisis period, many missions were assigned to the central banks, which used the monetary incentive mechanism to the fullest. Of course, monetary incentives cannot be successful without the support of fiscal policies, since central banks do not have superpowers apart from policy tools. Because, due to the disruption in the employment market in the Covid-19 crisis, significant unemployment has turned into long-term unemployment and there is a serious loss of income, access to credit channels cannot be a solution at the exit from the crisis. It is impossible for them to accelerate the monetary cycle by keeping interest rates low. Recession is not just the Fed's problem; other major economies also suffer from this problem. The factors that make up the crisis continue to be active, the economy cannot become self-sustaining, employment cannot recover and the economy cannot enter a demand cycle with the effect of restrictions. The Biden administration's fiscal stimulus package will seem to be somewhat disrupted. There is also opposition to the package from Democates, which will negatively affect the negotiation process and the size of the package.

These factors are; It prevents us from predicting "tapering" in the foreseeable future. The Fed will be at a point that the continuation of the expansionist stance, taking into account the current economic risk balance. Whether 2021 will be a good year for major economies will be important. Depending on having a good year, guidance towards slowing down asset purchases, as in 2013, may be in question for the upcoming period. If the Fed starts to direct this towards the end of 2021, depending on the situation, the interest rate hike indicated to 2023 may be backdated a little. The criteria for this are; For the revival of the economy, the demand must be settled and a permanent inflation movement must be seen in this context. The numerical increase in inflation will not be a criterion for the Fed.

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