The Federal Reserve annouced the US benchmark lending rate was left unchanged at 2.00 percent. What should really hit home though was that the vote to keep rates steady was unanimous. This certainly countered the sharp change in speculation over the past two days. With Lehman Brother having already filed for bankruptcy, Merrill Lynch being sold to Bank of America and AIG on the verge of a implosion, traders in most markets were expecting a reaction from the Fed akin to what they had seen towards the end of 2007 and beginning of 2008 - at least one quarter percent cut or perhaps even a 50 basis point easing. In fact, Fed Fund futures at the height of the market panic yesterday were pricing in a near 90 percent probability that the benchmark rate would be lowered today (a dramatic change from a few weeks ago when the the forecast was calling for no change through the end of the year).
Along with the unchanged rates, the Fed delivered commentary largely in line with what the market has precieved of conditions. The Board said employment had weakened further and economic growth has suffered for it. At the same time, inflation was noted to be high but was expected to moderate this and next year. Altogether though, the FOMC kept a balance by suggesting both economic activity and price growth were ‘significant concerns’. Tipping the scales was the note that financial market strains had increased ‘significantly’ (perhaps a little understated). And, while this countered what volatile speculation may have predicted, it was right in line with the middle-of-the-road economists had forecasted. As such, the dollar saw a modest rebound, but was largely lacking direction. Equities, on the other hand, plunged as they weren’t affored the relief hoped for.