• Home ::
• Fundamental ::
• Interest Rates ::
• US: FedWatch

• Send
• Print
• Add To

US: FedWatch

3c3e74d2-41af-4b14-b57a-f4b8a63007b5

6

0

Fed cut its target rate to the lowest level on record

Wed, Dec 17 2008, 14:47 GMT
by BBVA Bancomer Team

BBVA Bancomer

• The economic outlook worsened and FOMC expect inflation to moderate further

• Fed funds are likely to remain low in 2009 and 2010

• Exceptional measures will follow

In an unprecedented decision, FOMC lowered its target interest rate to a range between 0 and 0.25% from a previous 1% (it has reached a historical low). The Board of Governors decided to cut the discount rate by 75bp to 0.5%. Rates are likely to remain at these levels in 2009 and very probably also in 2010.

In the intermeeting period, economic and financial indicators deteriorated sharply, signaling a deeper GDP contraction. Fed highlighted that “consumer spending, business investment, and industrial production have declined” and that “overall, the outlook for economic activity has weakened further.” In addition, inflationary pressures continue to fade away. Members appear to be confident that lower commodity prices and greater economic slack are likely to result in lower inflation ahead. In fact, “the Committee expects inflation to moderate further in the coming quarters.”

With escalating downside risks to both economic growth and inflation, the Fed not only cut rates to an unprecedented level but it also suggested explicitly that interest rates are likely to remain low for a considerable period of time: “weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.” This reflects FOMC intention to generate a significant impact on agents’ expectations, as it did in late 2003.

To maximize the effect of today’s cut, FOMC stressed that its main policy objective will be “to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level”. This anticipates a strategy, outlined by Bernanke in some past speeches, geared to lower longer term rates by purchasing Treasuries, directly influencing yields on privately issued securities, and eventually cooperating with fiscal authorities to put a “money financed tax cut”.

Quantitative measures currently being taken (currency in circulation is growing at the fastest rate since April 2003 and well above the rate of inflation) are likely to continue broadening in the coming months. We expect FOMC to end up their debate purchasing Treasuries or even going further in the expansion of currency in circulation to boost the fiscal plan to be put in place next year.

• Download full US FedWatch with charts

Published on  Wed, Dec 17 2008, 14:50 GMT