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The Fed Cuts Rates to 1%, Cites "Downside Risks"

Written By Brian Hicks

Posted October 29, 2008




This one was baked in the cake, but the Great Oz has spoken again. As expected the Federal Reserve cut the fed funds rate to 1%.

That met the market’s expectation of 50 basis points as the vote was again unanimous.

But while the Fed’s latest move didn’t disappoint the Street, it also didn’t do much to stem the volatility either.  The market sold off hard at the close again finishing down 74 points.  Twelve minutes before the close the Dow had been up 298.

More whiplash.

Part of that, no doubt had to do with the overall tone of the Fed’s statement, which was sobering to say the least.

From the Federal Reserve

“The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent.

The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.

Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain.

The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, and San Francisco.” (emphasis mine)


Meanwhile, tomorrow’s big news story is the initial reading on third-quarter GDP.  And if the Fed’s statement today is any indicator it could well be negative. 

Economists surveyed by expect that GDP fell by 0.5% annually after rising 2.8% in the second quarter.

We shall see.

My own opinion is that we have been recession since Q4 2007—even if it doesn’t meet the technical definition of 2 consecutive quarters of negative growth.