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US: FedWatch

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FOMC Meeting, March 18th

Wed, Mar 19 2008, 11:14 GMT
by Marcial Nava, Alejandro Neut

BBVA Bancomer

• • The Fed lowered its target rate by 75 basis points to 2.25%. The statement continued to stress the downside risks to growth, acknowledging higher uncertainty on the inflation side

• • The outlook remains fraught with danger, recognizing the deterioration of credit conditions and the overall economy since their last scheduled meeting in January 30th
  

• • FOMC was more pessimistic regarding inflation. It recognized that inflation expectations have risen, adding more uncertainty to the inflation outlook. Still, the Committee expects inflation to moderate in coming quarters
  

• • With Fed Funds rate at 2.25%, the room for further cuts has diminished; recent actions and today’s statement explicitly acknowledge this fact by pledging to include policy measures other than target rate cuts.
  

As it was widely expected after the measures announced this past weekend, the Federal Open Market Committee (FOMC) reduced the fed funds rate 75 basis points to 2.25%. Fed negative bias was evident after last week’s $30 billion rescue package for Bear Stearns and Sunday’s reduction in the discount rate and the creation of an open ended lending program for the biggest investment firms in the US.

Today’s statement highlighted the risk inherent in the current tightening of credit conditions and reiterated the Fed commitment to help forestall its effects on the economy. It pledged to “act in a timely manner as needed to promote sustainable economic growth and prices stability.” Regarding the economic outlook, FOMC was more pessimistic than in the previous statement. This is in line with recent economic releases and the trends pointed out by our leading indicators.

For the Fed, inflation risks have risen but are still deemed under control. Both uncertainty and inflation expectations have increased. This is consistent with still elevated inflation readings. Presumably, higher uncertainty about inflation led two members to vote against this rate cut for considering it too aggressive.

With this reduction, the room for further cuts has diminished. Recent actions and today’s statement explicitly acknowledge this fact by pledging to use policy measures other than rate cuts. Other potential measures include direct intervention to rescue financial intermediaries in distress and straightforward liquidity injections through windows other than open market operations.

The Fed funds rate is approaching to the lower bound of our forecast for 2008 (currently at 1.5% by year end). Thus, we maintain our outlook on the Fed funds rate, but increase the probability for it to reach the lower bound of our estimates.

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Published on  Wed, Mar 19 2008, 11:21 GMT