Daily analyst comments

On June 24, the US Federal Open Market Committee announced that the target range for the federal funds rate would be maintained at an exceptionally low level of zero to 0.25%.

The FOMC marked in its press-release that although the US economy was still receding, the pace of economic contraction was slowing. "Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales", the FOMC said. As for inflation, the Committee believes that in spite of growth in prices for energy resources, inflation will remain subdued for some time.

The Federal Reserve believes that economic activity is likely to remain weak for some time; therefore, the committee will proceed with its policy actions aimed at fostering economic growth. Apart from keeping the federal funds rate at a low level, the Fed is set to increase the volume of money supply as was announced at previous meetings. Particularly, the Federal Reserve will purchase a total of up to USD 1.25 trillion of mortgage-backed agency securities and up to USD 200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to USD 300 billion of Treasury securities by autumn.

Investors were somewhat disappointed with the Fed’s assessment that economic conditions are likely to warrant an exceptionally low federal funds rate for an extended period. In our opinion, the fiscal measures implemented by the Federal Reserve could help stabilize the financial market and support to the economy in the mid-term. At the same time, these measures are characterized with a high long-term inflationary potential. If the money base is raised now, it may further transform to money supply, which could cause a sharp acceleration of inflation.