As expected, the Federal Open Market Committee cut the fed funds rate by 25bps to 2.00 percent – the lowest since November 2004 – which brings the grand total of rate cuts since last September to 325bps. However, the FOMC also signaled that may be nearing the end of the rate cut cycle. There was little doubt the rocketing commodity prices were creating substantial upside inflation risks, but the recent uptick in core CPI – which excludes these factors – was enough to make the FOMC’s inflation hawks uncomfortable. In fact, FOMC members Richard Fisher and Charles Plosser, who have both issued hawkish commentary over the past month, dissented and “preferred no change in the target for the federal funds rate.”
The FOMC clearly remains concerned about the economy, which is unsurprising given souring confidence, deteriorating labor market conditions, and the housing collapse that is far from over. Furthermore, credit markets remain very tight and the financial markets remain under stress, which is why the Federal Reserve has been so keen to boost liquidity via the creation of new and expanded lending facilities. However, it is worth noting that the FOMC called their past easing of monetary policy “substantial.” This comment along with concerns that “inflation expectations have risen” and removal of the phrase saying that “downside risks to growth remain” suggests that the rate cut cycle may be nearing an end.
The markets remain extremely choppy following this rate decision, as the US dollar, Treasuries, and DJIA have yet to make any sort of significant directional move. View our FOMC Preview from Wednesday for our view on how EUR/USD could play out.
Comparing the FOMC statements **New Language Highlighted
April 30, 2008
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 the 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.
March 18, 2008
The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.
Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.
Inflation has been elevated, and some indicators of inflation expectations have risen. 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 has increased. It will be necessary to continue to monitor inflation developments carefully.
Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner 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 less aggressive action at this meeting.
In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, and San Francisco.
Written by Terri Belkas, Currency Analyst for DailyFX.com