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FOMC: Aggressive cut by 75bp to 3.5%
Tue, Jan 22 2008, 15:45 GMT
by Peter Possing Andersen
Overview: Today at 14:20 CET the Federal Open Market Committee (FOMC), announced that it was lowering the Fed funds rate aggressively by 75bp to 3.50%. This happened on the back of market speculation of inter-meeting Fed action during the day. Todays action is indeed a signal that the Fed is very concerned about the economic and financial situation. Further, the fact that the central bank has acted so decisively just a week ahead of the meeting, may indicate that it has concerns about, not only the economy, but also systemic risks in the financial system.
Details: In the accompanying statement, the FOMC noted that the 75bp easing of monetary policy rests on a combination of deteriorating conditions in financial market, tighter credit, a deepening of the housing correction, and the soft labour market.
There is little doubt that the Federal Reserve is now very concerned about negative feedback effects from the financial market to the economy. The combined deterioration in financial markets and economic data have increased the risks of the economy entering a negative spiral. Moreover, it indicates that the FOMC might be highly concerned about the stability of the financial system.
The forward looking part of the statement was rather unspecific. Indeed, the Fed is very open-ended in its communication. While explicitly stating that further easing may be necessary down the road, this action leaves no doubt about the bias of the central bank.
Assessment & Outlook: The decision to cut rates this aggressively only one week prior to the next monetary policy meeting is complicating the short-term picture quite a bit. Surely we cannot rule out that the central bank will cut rates further on the upcoming meeting next Wednesday, as this will crucially depend on the course of the financial markets in the next few days. Beyond that, further easing is in the pipeline, in our view.
Published on Tue, Jan 22 2008, 16:01 GMT
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