The Rough Road Ahead: Liquidity Conditions Easing, Economic Uncertainty Rising
Fed Chair Jay Powell gave an official update to the Fed’s policy on inflation targeting.
The European Central Bank, the Bank of Japan, the Bank of England, and the Swiss National Bank have all announced today that they would be scaling back their US dollar liquidity operations due to “continuing improvements in US dollar funding conditions and the low demand.” This is the second time the central banks have cut back —now, instead of offering the swap lines for short-term dollar funding three times a week, it will be cut back to once a week.
The Fed had reinstated the swap lines with several central banks in March to ease liquidity constraints globally after a surge in demand for dollars —the amount outstanding has tapered off since June.
While liquidity conditions have stabilized in developed and emerging economies, the macro outlook remains highly uncertain, and mixed data is keeping everyone on edge—including the Fed.
Today, U.S. initial jobless claims experienced an increase to 1.1 million, seasonally adjusted. This increase was above the estimates of 920,000 for initial claims. Non-seasonally adjusted numbers also show an increase to 891,510. However, continuing claims dropped to 14.8 million, seasonally adjusted—this estimate was 15 million.
Pandemic Unemployment Assistance, a program for those who don’t typically qualify for unemployment such as self-employed persons, rose to 542,797.
Most states have a maximum of 26 weeks to receive unemployment, but some states grant fewer weeks than that. For those who have exhausted their regular benefits, they can apply for Pandemic Emergency Unemployment Compensation, which grants them an additional 13 weeks of jobless benefits.
Yesterday, the FOMC Minutes for the July 28-29 meeting was released, and it reiterated their commitment to continuing their course for easy monetary policy for the time being without any clear indications of when and how they might deploy more tools to support the economy.
Fed officials believed that more government support would be necessary in order to prevent a more painful, drawn out recession. In addition to fiscal support dimming, officials are also concerned about growth disruption both domestically and abroad as well as tightening credit markets. They also cited the long-term effects of “possible restructuring in some sectors of the economy that could slow the growth of the economy’s productive capacity for some time,” signaling concern over economic stagnation.
No yield curve control was implemented, and very little new action has taken place—at the moment, the Fed is keeping their options open, watching for any sort of disruptions and deliberating on what might be their next move. The FOMC will meet again on September 15-16.
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