At a session on March 18, the Federal Open Market Committee made a decision to cut the basic interest rate by 75 basis points to 2.25%. This is the sixth of a series of rate cuts since September 19, 2007. Simultaneously, the Fed cut the discount rate, at which it directly lends funds to banks, to 2.5%.
The Fed said in a statement that ‘the economic activity has slowed down.' Slowdown in consumer spending is being monitored, as is weakness on the employment market. The implications of the subprime mortgage crisis and the toughening of lending conditions will continue to put a downward pressure on the economy. The Fed points out acceleration in the inflation and a rise in inflationary expectations, prompting it to ‘continue keeping a close watch on inflation in the future.'
The reduction in the rate is aimed at ensuring moderate economic growth, which the Fed now views as its priority task. We believe that the measures being taken by Fed are starting to yield some positive results. Yesterday, financial companies Goldman Sachs Group and Lehman Brothers Holdings released their accounts, which appeared far better than analyst forecasts. Raising liquidity in the financial sector, the Fed's priority task now, will probably lead to resumption of economic growth in the US, but this may happen no sooner than in 3Q 2008, when the measures being taken will start to produce a positive impact on the real sector of the economy. The drastic measures being taken by Fed are indicative of the high likelihood of a recession in the US economy and show that the liquidity crunch on world financial markets is not yet over.
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