The US Federal Reserve System (FRS) cannot afford to fight inflation through a rate increase, as this will cause an increase in the cost of servicing the US national debt.

The Fed will hold a regular meeting this week and on Wednesday, July 28, will announce a decision on monetary policy. Following the results of the previous meeting in mid-June, the regulator, as expected, kept the base interest rate at the level of 0-0.25% per annum.

For Russian investors, the decision on the rate of the American financial regulator is important, because it will determine the attitude toward risky assets, including Russian stocks and bonds. The Fed’s rate hike traditionally causes an outflow of funds from global investors from risky assets.

However, in the current conditions, such a step is unlikely – at least because the US national debt is now not 30-40% of GDP, but about 130%.

High real rates can become a serious problem for state finances, especially given the fact that the Federal Reserve’s buyout of state securities directly contradicts the task of tightening monetary policy. Therefore, despite the inflation risks, the Fed may simply be physically unable to fight inflation by raising rates. At least, right away. As a result, the probability is growing that the US will have to resort to a tough fiscal policy.

The combination of soft monetary and tight fiscal policy is very favorable for bonds, and this is another explanation for the decline in the yields of long US treasury bonds. But it is also painful for stocks, especially those belonging to cyclical sectors, such as construction, transport, metallurgy, non-essential goods, and services (discretionary), etc.