Daily analyst comments
FOMC preserves federal funds rate at record low level
30.04.09 10:52
Field: Economics & Strategies
The US Federal Reserve continues to adhere to a monetary policy aimed at supporting the financial markets: the federal funds rate has been kept at an exceptionally low level of 0-0.25%. In addition, the Fed continues its earlier announced measures to increase the money supply. In our opinion, the existing monetary policy could help stabilize the financial market and bail out the US economy; however, the policy has a high inflationary bias in the long-term.
On April 29, the US Federal Open Market Committee (FOMC) announced after a two-day meeting that the federal funds rate would be preserved at a record low level of 0-0.25%.
According to the FOMC announcement, "the [US] economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit". As for inflation, according to the FOMC, it "will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term". Low inflationary pressure is likely to warrant an exceptionally low level federal funds rate for an extended period.
The Committee notes that although the economic outlook has improved modestly since March, it continues to implement monetary and fiscal policies aimed at stabilizing the financial markets. Apart from preserving the federal funds rate at the current level, the Fed also plans to increase money supply as voiced at its previous meeting. In particular, the Federal Reserve is to purchase a total of up to USD 1.25 trillion of agency mortgage-backed securities and up to USD 200 billion of agency debt by the end of the year. In addition, the Federal Reserve is to buy up to USD 300 billion of Treasury securities by autumn in order to improve the situation on the credit market.
World financial markets were neutral about the Federal Reserve’s announcement. The FX market responded with a surge in the rate of the US dollar compared with major world currencies, which was due to the Fed’s projections for economic stabilization. In our opinion, the Federal Reserve’s monetary policy should help stabilize the financial market and bail out the economy in the mid-term. However, the policy has a high long-term inflationary bias. If the money base grows now, it may be further transformed into money supply, which could lead to a sharp growth in inflation.