At its regular session on September 16, the Federal Open Market Committee decided to hold its benchmark Federal Funds rate unchanged at 2.0%. This is the third decision to keep the rate intact after a series of cuts between September 2007 and April 2008. During that period, the interest rate decreased by 3.25%, from 5.25% to 2.0%.
The Federal Reserve stated that tensions on the financial markets had escalated, and weaknesses in the employment market had intensified. To add to this, economic growth had slowed, partly due to a fall in the rate of consumer spending. The Fed believes that complex conditions on the debt market, a downturn in the real estate market and a slowdown in exports will continue to exert pressure on the economy for the next few quarters.
As regards inflation, the Fed notes its recent high level, citing growth of prices on commodity markets in the first half of the year. Fed members also point out that high uncertainty over the future rate of inflation could linger, even though its pace is expected to slow this year and early next year.
As follows from the wording of the statement, FOMC members have opted to not make any hasty decisions, and have not yet reacted to the events that have occurred in the past few days. As before, the official statement expresses concerns over the pace of inflation and economic growth rates. However, a certain shift in emphasis towards prospects for economic growth and expectations of an easing of inflationary pressure show that the Federal Reserve now has additional levers to stimulate the economy. We view a one-off reduction in the benchmark Federal Funds rate before the end of 2008 as the most likely scenario.
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