Emergency Rate Cut at the Fed
Posted on 22 January 2008 by
The full statement issued today by the US Federal Reserve on the reasons for the emergency cut in the Fed Funds rate today by 0.75% is below. Note particularly the sentences I have highlighted, which strongly imply another cut at the next scheduled meeting on 30 January.
The US Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent.
The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.
The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.
Appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.
With the next scheduled Fed meeting only 8 days away on 30 January a whopping 0.75% cut in the Fed Funds rate so soon before a scheduled meeting smells of real panic at the Fed. Despite the regular Fed meeting being only 8 days away the market is expecting another rate cut then, and not just a measly 0.25%. The Fed Funds futures market is betting on a further 0.5% reduction at that meeting, taking the rate down to 3%. Both Goldman Sachs and Capital Economics are forecasting the rate will fall to 2.5%, with the latter anticipating a 0.5% cut on 30 Jan, followed by cuts of 0.25% at the following two meetings – in March and April.
The last two emergency rate cuts made by the Fed were 0.5% on 3 January 2001 to 6%, following the dotcom bust, and 0.5% on 17 September 2001 to 3%, in the wake of the 9/11 attacks.
The MPC said this afternoon it will not cut UK Bank Rate prior to their next scheduled meeting on 7 Feb. However, a 0.25% cut on 7 Feb was regarded as almost certain before today but the Fed's move almost certainly guarantees a 0.5% cut will be seriously discussed, and may well be implemented. The minutes for the last MPC meeting are due out tomorrow but today’s action by the Fed suggests the MPC made a mistake in not implementing another 0.25% cut in Bank Rate at this month’s meeting.
Categories: Bank of England, Interest rates
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