Ho-hum, Another Fed Rate Cut
Federal Reserve Open Market Committee (FOMC) did its best to steer the
economy out of trouble by “help[ing] to promote moderate growth over
time and to mitigate the risks to economic activity” by shaving another
50 basis points off the federal funds rate. The FOMC agreed, by a 9-1 margin, to the rate reduction (only the Dallas Fed
President dissented). When combined with past rate reductions, the Fed
has dropped the funds rate a total of 2.25 percentage points, which
rivals the cuts of 2001 as the largest on record over a similarly short
the big difference between then and now is that conditions were much
worse back in 2001, as the economy was clearly in recession following
the dot-com bust and the aftermath of 9/11. By contrast, despite a
plethora of opinions that the U.S. is (or isn’t) in recession, no
one—including the Federal Reserve—really knows, and enough evidence to
point us one way or the other won’t be available for a while. Even this
morning’s weak employment data,
which indicated a net loss of 17,000 jobs during January, are a
preliminary snapshot of the labor market and may tell an entirely
different story in a couple of months after revisions are included.
Also, positive readings on capital spending and the ISM index were released this week, so the news is not all glum.
see the Fed as “hedging their bets” against the likelihood of a major
recession and the possibility that FOMC members, Fed Chairman Ben
Bernanke in particular, are worried about a ‘financial accelerator’.
For a discussion of the menu of concerns for the Fed, see here and here
(subscription req’d). As a side-story, one of the contributing factors
to recent equity market stumbles that boosted Fed’s concerns over
market confidence and prompted the rate cuts, may have been a rogue trader at the French firm SocGen.
02-01-2008 12:55 PM