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LGT Navigator: Fed remains on long-term alert

September 17, 2020

At the first review of the economic situation after the change of strategy at the Jackson Hole meeting, the US Federal Reserve (Fed) reaffirmed its expansive monetary policy and held out the prospect of maintaining zero interest rates until 2023. On Wall Street, the Fed announcement caused mixed feelings.

Federal Reserve monetary policy decision

In view of the corona crisis, the Federal Reserve will continue its zero interest rate policy and keep the key interest rate at a low level in the long term until the main goal of full employment in the labor market is achieved. The key rate will thus remain in its previous range of 0.0-0.25%. In addition, the Fed will continue its multi-billion-dollar purchases of securities at least at the current pace. Inflation is expected to rise to two percent and remain moderately above two percent for some time to come. According to Fed Chairman Jerome Powell, it is mainly the development of the corona pandemic that will determine the further course of the central bank. In view of the ongoing controversy in the US Congress over another corona aid package, Powell demanded that the state must expand its financial support during the crisis. At least the Fed is slightly more optimistic about the economic development. The central bank now forecasts a slump in gross domestic product of -3.7% in the current year, instead of the -6.5% previously anticipated.

On the New York Stock Exchange, the prospect of a long-term continuation of the zero interest rate policy is hardly providing any impetus. The Dow Jones Industrial initially rose by more than +1%, but then closed with a moderate daily gain of +0.13% at 28 032.38 points. The S&P 500 even left daily trading with a slight minus of -0.46% at 3 385.49 points. The technology-heavy Nasdaq 100 broke off its brief recovery and ended yesterday's trading day with a loss of -1.67% at 11 247.60 points. In contrast, the US dollar gained slightly following the Fed's decision. US government bonds initially lost ground, but then rebounded. In Asia, the majority of stock indices are lower after the Fed's decision. In Tokyo, the Nikkei Index, which comprises 225 stocks, lost about -0.6% and in Hong Kong the Hang Seng Index is trading about -1.6% lower.

Trump's Fed candidate faces stiff opposition

The nomination of Judy Shelton, a former campaign supporter of US President Donald Trump, for a director's position on the Federal Reserve's top committee seems to be meeting with increased resistance in the Republican-dominated Senate. Although the economist received the green light from the Senate Banking Committee in July, she does not currently have sufficient support in the small chamber. Shelton had in the past spoken out in favor of a return to the gold standard (valid until 1971) and criticized (as Trump did) the course of Fed Chairman Jerome Powell. If Trump succeeds in his re-election on November 3, he could nominate Shelton as the new head of the Federal Reserve. Powell's term of office expires in 2022.

Recovery of US consumption loses momentum

Although sales in the US retail business rose by +0.6% in August compared with the previous month, the recovery from the corona shock appears to be losing momentum. The increase was thus lower than analysts' consensus forecast of +1.0%. Moreover, the initial sales growth of +1.2% reported in July was lower at +0.9% according to revised figures. The slowdown in momentum is likely to be linked to the ongoing tense pandemic situation in the US on the one hand, and to the expiration or reduction of unemployment benefits in July to curb the corona effects on the other.

Bank of England's monetary policy position focus

Britain's central bank will announce its interest rate decision today at 13:00 CET. In view of the ongoing corona crisis and declining inflation, the Bank of England is likely to stick to its previous expansive monetary policy course. Meanwhile, the rate of consumer price inflation in the UK weakened significantly in August. Over the year as a whole, the inflation rate fell from +1.0% to +0.2%. This was mainly due to lower prices in restaurants and the leisure sector against the backdrop of the corona crisis. However, analysts had forecast an even sharper decline to zero percent.

OECD economic outlook slightly more optimistic

In its economic report published yesterday, the Organization for Economic Cooperation and Development (OECD) assumes that the economic slump in Europe and the US will probably be less severe than previously feared and that China's economy will show slight growth. According to the forecasts of the Paris-based organization, the global economy will contract by around -4.5% in the current year before a recovery (+5.0%) can be expected in the following year.



Economic Indicators September 17

MEZ Country Indicator Last
08:00 SZ Exports (August, m/m) +2.3%
08:00 SZ Imports (August, m/m) +1.1%
11:00 EZ Consumer Prices (August, y/y) +0.4%
13:00 UK Bank of England monetary policy announcement 0.1%
14:30 US Philly Fed Manufacturing Index (September) 17.2
14:30 US Housing Starts (August, m/m) +22.6%
14:30 US Building Permits (August, m/m) +18.8%

Earnings Calendar September 24

Country Corporate Period
US Nike Q1


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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
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Source: LGT Bank (Switzerland) Ltd.

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