FED Statement
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…
Our scenario is perfectly in line with this statement. No need for fine tuning of our anticipations…
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Comments:
The move came with a repetition of the discord that has accompanied some of the Fed’s interest rate cuts in the past, each time provoking criticism among conservative economists and other commentators.
Two regional Fed bank presidents on the policy-setting committee again dissented from the decision to cut interest rates. They and many other economists have called on the Fed to shift its focus from countering a possible recession to heading off inflation spurred by the high costs of food and energy.
The Fed’s statement signaled that it was on the verge of doing just that, but wanted to nudge rates lower one more time to show its concern about weakness and instability in the markets and the economy at large.
The Federal Open Market Committee — comprising Fed board members and presidents of regional Federal Reserve banks — employed careful language cues to suggest that it was finished lowering rates, for now anyway.
“The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity,” the committee said, “should help to promote moderate growth over time and to mitigate risks to economic activity.”
[…]
The fact that in its statement Wednesday, the Fed also omitted references to the “downside risks” to the economy and to its intention to respond to those risks “in a timely manner” — words used in March when rates were last cut — was also a sign of a pause in rate-cutting.
At the same time, the Fed appeared to leave itself enough room to act to stimulate the economy if the situation deteriorates.
“The Fed is leaving it up to financial markets to determine what they do next,” said Michael T. Darda, chief economist at MKM Partners, a private equity and research firm. “I don’t know if we call this a hint of a pause. It was more like a soft gesture.”
Two anti-inflation hawks on the Open Market Committee — Richard W. Fisher, president of the Dallas Fed, and Charles I. Plosser, president of the Philadelphia Fed — voted against lowering the rates, as they had last month when the rates were cut to 2.25 percent, from 3 percent.
But some economists skeptical about the need to stimulate the economy, and sharing the Fed dissenters’ concerns about inflation, said that by itself the latest Fed action would not have much of an impact.
“I think it will do little good in terms of economic expansion and the credit market’s problems,” said Martin Feldstein, professor of economics at Harvard and president of the National Bureau of Economic Research.