The Federal Reserve lowered interest rates by 25bp to 4.50 percent, giving the financial markets exactly what they wanted and nothing more. The FOMC statement remained virtually unchanged, signaling that any further rate cuts by the Federal Reserve will be gradual. Interestingly enough, the Fed indicated that the upside risks to inflation roughly balance the downside risks to growth. In other words, their monetary policy bias is neutral with a tinge of hawkishness. 
There was one dissenting vote by Hoenig, who favored leaving interest rates unchanged. The last time a rate decision was not unanimous was in December 2006 and that did little to foreshadow further moves to come, so not much weight needs to be placed on this piece of news. Even though third quarter growth was strong, the Fed is still worried about a potential slowdown in the near term. As a result, they have decided to take another proactive measure to prevent a further slowdown in the US economy. It seems today’s decision has been obligatory since the consequences of not easing and disappointing the markets would have been too severe. For economic bears, the Fed failed to deliver. As for future interest rate cuts, the Fed did not commit to anything, but we still expect at least another 50bp of easing before this rate cycle is over. Right now, the chance of a December rate cut is fifty-fifty. Over the next three to six months we are still looking for the EURUSD to rise above 1.50 and the AUDUSD to hit parity. BUT non-farm payrolls is the next major event risk. Given the sharp rise in the ADP survey, we could see a short term bounce in the dollar as traders adjust positions in favor of a stronger NFP number.
[B]Comparing the FOMC statements[/B] [B]**New Language Highlighted[/B]</div>
[B]October 31, 2007[/B]
The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/2 percent.
Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.
Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.
The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Donald L. Kohn; Randall S. Kroszner;
Frederic S. Mishkin; William Poole; Eric S. Rosengren; and Kevin M. Warsh. Voting against was Thomas M. Hoenig, who preferred no change in 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 5 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Richmond, Atlanta, Chicago, St. Louis, and San Francisco.
[B]September 18, 2007[/B]
The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4-3/4 percent.
Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.
Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.
Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.
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