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Ho-hum, Another Fed Rate Cut

The 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 period.

 

However, 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.

 

Analysts 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.

Posted 02-01-2008 12:55 PM by Brian Lego
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