Interest Rate Roundup

Wednesday, April 30, 2008

Fed cuts 25 bps, shifts to "neutral"

The Federal Open Market Committee cut the federal funds rate by another 25 basis points to 2%. That brings the cumulative tally of easings to date to 3.25 percentage points. The post-meeting statement read as follows:

"The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 2 percent.

"Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.

"Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.

"The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

"Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred no change in the target for the federal funds rate at this meeting.

"In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 2-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Atlanta, and San Francisco."

It's worth nothing that both Plosser and Fisher disagreed with the FOMC majority again. Both wanted no cut at the meeting. Also, the Fed stripped out a sentence from the March 18 post-meeting statement that read: "However, downside risks to growth remain." This seems to validate market expectations that the Fed has moved to a more neutral stance on interest rates. However, I'm surprised the Fed didn't use today's meeting as an opportunity to send a stronger signal about inflation and the dollar.

UPDATE: On an unrelated note, I have now enabled commenting on the blog. For certain reasons, I have chosen to do so on a moderated basis. So try to play nice! Thanks ...

5 Comments:

  • Helicopter Ben has walked right into the liquidity trap. Although we may see a sell-off in Oil/Gold and other commodities (and a strength in US$), it will be short-lived.

    Inflation won't remain down and Helicopter Ben will be forced to raise rates in the middle of crushing recession during the next 3-4 months.

    By Blogger shankar, at April 30, 2008 at 7:50 PM  

  • Mike, love your blog! It's nice to see the comments are now "ON." The doctor is "IN." Take care.

    By Anonymous Anonymous, at April 30, 2008 at 8:59 PM  

  • I have been following this blog for a while and I appreciate your commentary and insights. Keep up the great work!

    By Blogger WarChestSM, at May 1, 2008 at 12:47 AM  

  • Mike,

    Glad to see that we can comment. I read your blog daily!

    By Anonymous Anonymous, at May 1, 2008 at 8:47 AM  

  • I'd like to see more discussion about inflation from the Feds/Gov't.

    Besides rising gas and food prices, let's talk about rising healthcare costs too. I'm seeing 30-50% increases in what my employer charges back to me for health insurance and at the same time seeing capped pay increases 2-2.5% every year due to cost down efforts related to fuel surcharges and increasing commodity prices. 2-2.5% doesn't even cover "core" inflation!

    EVEN WORKING CLASS PROFESSIONALS ARE GETTING SQUEEZED IN THE MIDDLE.

    By Anonymous Anonymous, at May 1, 2008 at 8:54 AM  

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