Will the Fed take a vacation?
There is nobody who’d like to experience the situation the Federal Reserve is in at the moment. The monetary policy meeting has begun. The Fed faces the possibility of lowering growth on the one hand and growing inflation level on the other. Moreover these two problems has only exacerbated over the past weeks. The US employment sector deteriorated throughout 3 months and we suppose it will continue this trend for the fourth month.
The country economy is in the recession period and we have only to wait until the Federal Reserve will accept this fact. According to the tables issued in FOMC Preview the data of housing and labor sector declined in comparison to the previous Fed’s meeting. However such factors as growing inflation and some growth in the manufacturing sector turned to be good news. At the moment Federal Reserve is not able to use all the means (like increasing interest rates) to decrease the inflation. The only way out for the Federal Reserve is not to prevent the growth of the USD. Increased Euro was the mean to combat inflation in the Europe but the weak USD only contributes to its growth in the USA.
So, the easiest solution for the Federal Reserve at the moment that can have some positive consequences is to decrease rates by 25 bp and then take a pause for the summer Federal Reserve meeting. This will cause traders think that the will be no more rate cuts and will probably decrease Euro to the 1.50. Increased United States dollar will be a problem for the US exporters but it will contribute to combat the inflation. In case the Fed will not execute any rate cuts at the moment this wouldn’t mean that the Federal Reserve came to the end of the easing cycle. It means only the fact that the Fed provides the market an opportunity to accommodate to all the changes made since the last August. And in case there will be no reaction the Fed will be able to continue the rate cuts. As for the present situation they need some time to undertake some actions to prevent further inflation. The housing prices are still decreasing and the level of the consumer confidence is also falling.
