At a session on April 30, the US Federal Open Market Committee decided to cut the Fed main lending rate by 25 basis points to 2.0%. This is the seventh in the series of interest rate cuts since September 19, 2007. As a result, the lending rate has decreased by 3.25%, from 5.25% to 2.0%.
The committee said in a statement that ‘the economic activity remains sluggish' amid slackening demand from households and corporations. The financial markets remain under a pressure. The adverse lending conditions may produce a negative impact on the economic growth for the next several quarters.
For the first time in the series of interest rate cuts, the US Federal Reserve has pointed to the emergence of signs of inflationary risks, in addition to underlining the need to promote growth in the world's largest economy. The statement says that despite some improvements in the base inflation index, prices on energy resources and other commodities have substantially risen, fuelling inflationary expectations. The uncertainty as to the future pace of inflation remains high and it is therefore necessary to keep a close eye on the future rate of inflation," says the statement.
In our opinion, the rate cut of just 0.25% and shifting the emphasis to the accelerating inflation are indicative of the fact that the possibility of further rate cuts is diminishing and the Federal Open Market Committee is likely to take a pause. The news provoked a negative reaction from investors immediately after the release of the statement. For all that, we believe that the preservation of the lending rate at its current level in the mid-term may be indicative of both the growing inflationary pressure and some improvements in the US economy. That the economic situation may be changing for the better was indirectly confirmed by the recently published statistical data on the US 1Q 2008 GDP, which outpaced expectations.
3.888
11.862
