FOMC, March 13: Fed Funds Rate on Hold for Sustainable Economic Path (Business Brief No. 3258)

KResearch anticipates that the Federal Open Market Committee (FOMC) may maintain an ultra-easing monetary policy stance in its second meeting of this year slated for March 13, 2012. The Fed Funds rate is expected to be kept intact at 0-0.25 percent, and Fed may remain committed to maintaining it low until mid-2014. The launch of ‘Operation Twist', which involves selling short-term Treasuries in exchange for the purchase of longer-term bonds, plus a move to reinvest the proceeds of maturing investments into mortgage-backed securities, will move forward to maintain its balance sheet as well as money market interest rates to keep the US economic recovery on track. Fed post-meeting statements are expected to provide a positive outlook toward the momentum of the US recovery.

Nonetheless, the Fed may remain cautious amid numerous risks plaguing the US economy. Its accommodative monetary policy may continue as long as the European debt crisis is contained and spikes in global oil prices are only short-lived. Sharp upsurges in fuel prices are perhaps unlikely on the assumption that there will be no military clashes between Iran and Israel this year.

The Fed is also expected to signal no additional stimulus effort through another quantitative easing – QE3 – in this meeting. On the other hand, the Fed may take actions to keep the money supply in check as a preemptive measure against inflation expectation and the prevailing inflationary pressure, especially amid the lofty oil prices to avoid sending mixed signals to the market.

Looking forward, a major risk lies in the Eurozone's sovereign debt debacles. If the situation worsens greatly, the Fed may first await actions by EU policymakers. It may opt to take any actions if such risk is considered to significantly have negative consequences for the US economy, particularly its banking sector.

Close attention should also be paid to soaring oil prices. Should the Iranian-Israeli dispute escalate into a military showdown, global “stagflation” might ensue, given that global economies could be battered amid spiking inflation. The US economy would be no exception. In such a scenario, oil price upsurges might prompt the Fed to change or exit its ultra-accommodative policy stance. KResearch believes, however, that such dramatic circumstances are less likely, as the US Presidential elections are due this year, and a peaceful diplomatic solution may be sought by all parties concerned.