At a regular session on June 25, the Federal Open Market Committee decided to retain its benchmark Federal Funds interest rate at 2.0%. The decision followed a series of seven cuts in the rate from the end of September, 2007 to late April, 2008. In this period, the rate decreased by 3.25%, from 5.25% to 2.0%.
The Fed statement says that "economic activity continues to pick up", but the employment market has weakened and the financial markets remain under pressure. As for inflation, the committee expects its pace to be moderate this year and next. However, inflationary expectations are increasing in the wake of price rises on energy and other resources. So, uncertainty as to the pace of inflation remains high, and we expect inflationary pressure to remain in place. The Fed also underscores ‘a marginal decrease in the risk that the economy could plunge into recession' and also points to the growth of consumer expenses. In our view, however, the rise in consumer spending is due to the partial return of taxes, and this situation is unlikely to remain for long.
We believe that the emphasis put on financial market pressures and expectations of moderate inflation show that, unless current economic conditions change, the Fed is not likely to raise its benchmark rate, at least at its next session, which should send a positive message to investors in the short-term. For all that, the decision to retain the rate at its current level shows that economic growth problems in the US have not disappeared and the likelihood is high in upcoming months that negative trends in the US economy will persist. In our view, the Federal Reserve has adopted a wait-and-see position.
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