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FOMC January 29−30, Meeting

Thu, Jan 31 2008, 08:27 GMT
by Luis Arregoces

BBVA Bancomer

· In a decision anticipated by the market, the FOMC cut the fed funds rate by 50 basis points to 3.0 percent

· FOMC members stressed that the uncertainty surrounding the outlook remains, and inflation expecattations seem to be well anchored

· Overall, we believe that future rate cuts depend heavily on the pace of economic activity

There are considerable downside risks to economic growth and there has been no improvement since the last FOMC scheduled meeting in December. In the press release following today’s decision, committee members pointed out that recent information about economic activity is consistent with a “deepening of the housing contraction” and a “softening in labor markets.” This implies that the ongoing adjustment in the housing sector is making its pass-through to the broader economy, and recent data is more consistent with the prelude to a recession rather than a soft landing.

FOMC members stated that “Financial markets remain under considerable stress.” We consider that the longer these pressures remain the more likely is that economic growth will be significantly affected.

In our view, FOMC members remain concerned about the uncertainty surrounding the near-term outlook generated by the potential spillover effects that the current turmoil in financial markets could have on household spending.

Today’s rate is intended to “promote moderate growth over time and to mitigate the risks to economic activity”; however, it is not certain if this is enough to offset some of the negative effects on the broader economy that might arise from the ongoing adjustment in financial markets.

In addition, the committee indicated that inflation is likely to moderate in coming quarters. Overall, the FOMC is entering an evaluation phase in which the impact of the series of rate cuts has to be carefully analyzed before more adjustments to the target fed funds rate are implemented.

In our view, FOMC members are forced to leave all their options open in a context where uncertainty is high; this stresses that monetary policy depends on future economic developments. Given the available economic data, we expect a less restrictive policy if economic conditions do not improve or a pause if the economy responds well to the aggressive series of rate cuts.

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Published on  Thu, Jan 31 2008, 08:41 GMT