On August 5, the Open Market Committee of the US Federal Reserve (FOMC) held its regular meeting, where it took a decision to leave unchanged the federal funds rate at 2.0%. This was the second decision made after a series of rate cuts made from September 2007 till late April 2008. In the above period, the federal funds rate was reduced by 3.25% from 5.25% to 2.0%.
In their announcement, the members of the committee pointed at "an upturn in economic activities in 2Q 2008"; however, "the labor market continued to weaken, while the financial markets remained under a considerable pressure". The Committee believes that due to an early growth of prices for energy carriers and other resources, inflationary expectations remain high, which provokes an ongoing inflationary pressure. However, FOMC said in its announcement that inflation would gradually come down in both 2008 and 2009. The Fed also pointed at the ongoing risks of a slowdown in economic growth due to unfavorable credit conditions, ongoing weakening of the construction market and high prices for resources.
In general, the Committee's announcement was again balanced between the risks of an economic growth slowdown and a speed-up in the pace of inflation. In our opinion, the emphasis the Federal Reserve put on financial market pressure and the expectations of an inflation downturn are indicative of the fact that, if the current economic conditions continue, the Fed will not raise its base interest rate, at least at its next meeting, which should be positively perceived by investors in the short-term. However, the preservation of the base interest rate at the current level shows that the Federal Reserve is still caught in the situation where inflation accelerates and the economy falls simultaneously.
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