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27 Jun 2007

Financial Markets

FOMC Meeting: Fed Likely to Keep Interest Rate Unchanged

KASIKORN RESEARCH CENTER (KResearch) expects that the Federal Open Market Committee (FOMC) will likely hold their Fed Funds rate steady at 5.25 percent in this year's fourth meeting slated for June 27-28, 2007. Despite the better-than-expected US economic indicators released recently, including those on the US labor market, manufacturing and service sectors, the US economic picture as a whole still points to growth that is decelerating to below its fundamental potential this year, especially during 2H07 (although 2Q07 may record high growth). On the other hand, although inflationary pressures that remain the Fed's prime concern, it has yet to show any clear signs of abating, combining with the world's steep oil prices, ebbing US core inflation and the economic slowdown in the US are likely to keep inflationary pressures within manageable levels. Therefore, KResearch takes the view that the Fed may still have some leeway in managing monetary policy, i.e., they will likely adopt neither an expansionary nor a tightening stance in the foreseeable future. Even so, what should be closely monitored is the Fed's post-meeting statements that will imply their policymakers' views toward the US economy and inflation as well as with regard to key US economic indicators, in particular the job market and real estate industry. These factors may affect the trend of the Fed Funds rate in the future.
Concerning the impact on Thailand, KResearch views that adjustments in US economic indicators and the trend of the Fed Funds rate may influence the direction of Thai money and capital markets via the foreign exchange rate between the Baht/USD as well as on the yields in the Thai bond market like what was seen in June (the changed projection on the FED funds rate from downward to an upward trend would result in a stronger USD against other currencies, including the Baht; also boosting the yields on Thai bonds toward rapid rise.) However, the US interest rate trend is definitely not a major factor that will influence the decision of the Bank of Thailand's Monetary Policy Committee, where a more important factor will be adjustments in Thailand's economy and inflation, which still needs further close watch.
Disclaimer: This research paper is arranged for public information, which has been obtained from sources believed to be reliable. KResearch does not warrant its completeness, reliability or accuracy for commerce or fitness for a particular purpose. The information contained herein may be subject to change at any time without notice. Reliance upon any information contained herein shall be undertaken at a user's own risk KResearch shall not be liable to any user, or anyone else for any damage occurring from the use of any content herein. Nothing in this research paper shall be counted as containing any advice, recommendation or opinion for decision making in business.

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Financial Markets