The Federal Open Market Committee (FOMC) resolved at their meeting on June 21-22, 2011, to hold their Fed Funds rate at the current exceptionally low level of 0.00-0.25 percent, as anticipated by the market, and stated that they were ending the second round of their quantitative easing (QE2) Treasury bond purchase program, as scheduled, at the end of this month. With no further plans to withdraw liquidity from the system, the Fed will continue to reinvest maturing securities back into the market, so that their balance sheet remains intact over coming months.
On the economic front, the Fed has revised downward their growth projection for the US economy in 2011-2013, citing that slowing trends were being seen in several economic sectors. However, they raised their inflation projection for that period while maintaining a positive view toward the US economic rebound in 2H11. Against this backdrop, KResearch is of the view that the Fed will unlikely announce another round of the quantitative easing program (QE3) in coming months, because they will need time to monitor the economic outlook. The Fed may, however, be reluctant to tighten their monetary policy for now, thus leading to the expectation that the Fed will be one of the last central banks in the world to hop onto the policy rate hike bandwagon.
Amid the U.S. economy's structural problems (e.g., in the labor and housing markets, where recovery to post-crisis period may take a long time) and fiscal crises in Europe, KGroup by the Capital Markets Business Division expects that the Fed will probably need to hold their key policy rate at 0.00-0.25 percent for at least until the end of this year, or possibly into next year, meaning that the spread between Thailand's policy rate and the US rate may widen, thus supporting the Baht during 2H11.
Another downside risk that needs to be monitored would be the weakening fiscal position of the US government stemming from soaring public debt, which has now exceeded their regulated ceiling (leading credit-rating firms have warned that the US will need to raise their debt ceiling by early August to avoid losing their AAA sovereign credit rating). Another problem is a huge budget deficit on which the Fed fears fiscal austerity measures might be needed to address, but such a move would inevitably jeopardize the US economic recovery for years to come. KResearch thus views that the US may face greater difficulties in implementing their fiscal policy going forward, especially with respect to avoiding any dilemma that could inhibit their economy. A paradox of concern would be the fact that too loose a fiscal policy stance would erode confidence toward the US economy and their credit rating, while too austere a stance would undermine economic performance. Thus, the Fed will have to find a middle ground amid ever-increasingly complex challenges ahead.