Potential Changes to the Economic Recovery Strategy
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Potential Changes to the Economic Recovery Strategy

Photo by:   Markus Spiske, Unsplash
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Sofía Hanna By Sofía Hanna | Journalist and Industry Analyst - Fri, 08/27/2021 - 12:44

 

This week, representatives from financial and monetary authorities from across the globe attended the week-long US Federal Reserve’s annual meeting. Decisions taken at this meeting will affect global financial markets, explains BBVA Research.

The annual meeting at Jackson Hole, organized by the Federal Reserve of Kansas City, brings together economic and monetary authorities to discuss matters relevant to the world’s economy. Among the main topics that will be addressed is the strategy to begin withdrawing the monetary stimuli implemented in response to the crisis caused by the COVID-19 pandemic. 

Since the end of March 2020, it was clear that COVID-19 would halt global financial markets, so the priority became to have the highest possible liquidity to face the then potential crisis. This resulted in the collapse of the most liquid market in the world, explained the BBVA's economic analysis: "It was a very serious episode of risk aversion and widespread liquidity that resulted in the stock markets falling and most currencies depreciating against the dollar, which could even have resulted in a collapse of the credit markets. This did not happen thanks to the decisive measures of the central banks of developed countries, in particular the Fed, which not only reduced the monetary policy rate to zero but also began to inject liquidity into the markets through the purchase of bonds, both of the Treasury and mortgages."

Some country’s economic prospects are beginning to show improvements, especially the US, leading to a discussion regarding the limitation of the asset acquisition program. While this strategy was useful to combat the crisis and solve the problem of illiquidity, prolonging it would increase the risk of generating financial bubbles, explained BBVA Research.

As the medium-term prospects for the US economy look promising, pushing for a significant increase in productivity due to the increased use of digital and teleworking technologies, the discussion has shifted to start withdrawing monetary support. The strategy change aims to avoid high liquidity in the fixed income markets. Furthermore, under a housing market in which prices are breaking records, it is difficult to justify the Fed continuing to buy bonds.

Mexico is also showing better financial expectations. MBN previously reported that the country has presented continuous growth during 2021. However, experts explain that there are expectations that medium-term inflation will revert downward, with long-term inflation unchanged.

 

Photo by:   Markus Spiske, Unsplash

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