The US Federal Reserve held a regular meeting on January 30. At the meeting it was decided to cut the key interest rate by 0.5%. As a result, the key interest rate is presently 3%.
The Federal Reserve in its official statement said that the financial markets remain under considerable pressure. In addition, information indicates a decline in the housing market and weakening of the labor market. A committee representative expects that inflation risks are likely to decline in the next quarters; however, it is necessary to closely watch them. In our opinion, this statement means that Federal Reserve is ready to cut the interest rate further if it is necessary to calm down financial markets, to prevent recession and bolster moderate growth in the US economy.
We believe that Federal Reserve had to reduce the key interest rate so considerably, by 1.25% in two weeks, because of the real threat of a recession in the American economy. Therefore, in the short term, investors might be negative about these steps. We believe, however, that the monetary policy being pursued by the Fed will cushion the impact of the crisis on the US economy and allow the country to maintain moderate economic growth, which will have beneficial effects on the US stock market.
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