The rumors in Europe were true. The Federal Reserve enacted an emergency rate cut this morning to slash the fed funds rate by 75bp to 3.50 percent. The US Dollar was knocked lower on the news, but the question is, will it prevent the US stock markets from plummeting? Dow futures are down 3.06 percent, which is better than the -5.11 percent readings we saw overnight, but nevertheless, after Asian stocks fell the most in 17 years and European shares trade nervously, it looks to be a rocky day in the US markets. Furthermore, if fed fund futures continue to price in another 50bp cut next week, the greenback will likely continue to tumble.
[U]FOMC Policy Statement[/U]
“The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth…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…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.” – January 22, 2008
[U]Ben Bernanke, Federal Reserve Chairman (Voting Member)[/U]
“As the housing contraction begins to wane, as it should sometime this year, the economy should pick up a bit later in this year. But we believe we’ll see below trend growth certainly in 2008, and probably early in 2009 as well.” – January 17, 2008
[U]Richard Fisher, Federal Reserve Bank of Dallas President (Alternate Voting Member)[/U]
“One has to bear in mind that the seeds of inflation, once planted, can lie fallow for some time, then suddenly burst through the economic topsoil like kudzu, requiring a near-toxic dose of countermeasures to overcome.” – January 18, 2008
“As a voter on the FOMC this year, I stand ready to take substantive action to support growth and provide insurance against downside risk, as long as inflation expectations remain contained, The degree of substantive action to support economic growth and insure against downside risk will be conditioned to what we see coming down the inflation pike.” – January 18, 2008
[U]Sandra Pianalto, Federal Reserve Bank of Cleveland President (Alternate Voting Member)[/U]
“A weak December employment report, combined with a falloff in retail spending and flat industrial production, supports my view that the economy has shifted to a lower growth track.” – January 17, 2008
[U]Dennis Lockhart, Federal Reserve Bank of Atlanta President (Non-Voting Member)[/U]
“I think these circumstances call for policymakers to be prepared to respond pragmatically. In my view, pragmatism in the face of growing weakness in the general economy may very well require additional moves to lower the federal funds rate.” – January 18, 2008
[B]ECB: Trichet Remains Hawkish, Supporting Additional Euro Gains
While rhetoric from European Central Bank President Jean-Claude Trichet sounds unabashedly hawkish, commentary from other central bankers suggest some hesitance to make interest rates more restrictive. Indeed, continued instability in the markets and vulnerable credit conditions warrant some careful consideration, as the drawbacks of a sharp economic slowdown may outweigh the risks of persistent inflation pressures. Nevertheless, the ECB’s primary mandate is price stability and until CPI falls back from current levels of 3.1 percent towards the bank’s 2 percent ceiling, Trichet is not likely to even consider cutting interest rates.
How do you think this will impact the Euro? Will it return to 1.50? Discuss the topic in the DailyFX EUR/USD Forum.[/B]
[U]Jean-Claude Trichet, European Central Bank President[/U]
“Recent productivity growth in the euro zone is judged by the European Central Bank to be of a cyclical nature, rather than more permanent.” – January 17, 2008
“You know the position of the (ECB’s) governing council, and of course last week’s statement is still valid.” – January 17, 2008
[U]Mario Draghi, European Central Bank Monetary Policy Committee Member[/U]
“The decisions of the ECB Governing Council, especially regarding interest rates, are and will remain focused on this objective (price stability).” – January 21, 2008
[U]Vitor Constancio, European Central Bank Governing Council Member[/U]
“The ECB kept rates on hold depot inflation risks due to the financial turbulence and the difficulty to understand its impact on the real economy.” – January 21, 2008
[U]Axel Weber, European Central Bank Governing Council Member[/U]
“We observe price developments with concern - in Germany, as well as in the common currency area. Notwithstanding, one shouldn’t overdramatize those current rates.” – January 16, 2008