Daily analyst comments

On March 18, the Federal Open Market Committee published its rate decision. As a result of its two-day session, the committee again opted to keep its base rate unchanged at a record low level, within the targeted range of 0% to 0.25%, depending on economic conditions.

In its statement, the Fed pointed to the further deterioration of economic conditions: consumer demand is in decline, along with rising unemployment and limited access to credit resources. Exports are also on the way down, as the economic environment for the United States’ trading partners worsens. US Fed representatives have predicted that inflation, even though subdued, will remain in place for a long time period.

In the wake of the meeting, the Fed has decided to move ahead with the current monetary policy, aimed at stimulating the economy. In addition to the decision to keep the base rate intact at a record low level, plans are underway to inject over USD one trillion into the economy. To bolster the mortgage market, an additional USD 750 million is to be released to buy out mortgage bonds and a further USD 100 million to take over agencies’ debts. Furthermore, over the next six months, the Fed is to buy out USD 300 billion worth of state bonds in order to improve conditions on the credit markets.

According to our estimates, the stated monetary measures will please world financial markets. The announced package of measures, aimed at further boosting liquidity and buying out troubled assets, is capable of stimulating economic growth in the mid term, which should affect the current value of financial assets. However, in the long term, rapid growth in the money supply may contribute to inflationary pressure in the economy. The foreign exchange market has already reacted to the Fed’s rate decision by weakening the dollar against the world’s main currencies, while gold, which is traditionally used as a hedge against inflation, has risen 10% in value.