For the First Time Since 1997, the Fed Is More Dovish than Brad DeLong

I wouldn't have done it. I would have kept the FF rate at 4.75% and dropped the discount rate to 4.75%. But it is a marginal change...

Eoin Callan, Michael Mackenzie, and Daniel Pimlott report for the Financial Times:

FT.com / World - Fed cuts rates by another quarter point: The Federal Reserve cut US interest rates by a quarter point to 4.5 per cent on Wednesday in a bid to protect the American economy against the risks from the housing slump and credit squeeze. The second successive rate cut by the central bank follows an accelerated decline in the housing market that has confirmed some of central bankers’ worst fears and fostered fresh jitters in financial markets.

Disappointing earnings in the banking sector and downbeat corporate forecasts have added to concerns about a slowdown in activity, despite a strong overall economic performance last quarter. “This one was for the banks. The cut is intended to keep money flowing freely and stem the risk of spillover from the financial markets to the real economy,” said Jeoff Hall, an economist at Thomson Financial. Financial stocks have lagged the overall market as the third quarter earnings season has delivered the first negative quarter of profits year-over-year for S&P 500 companies since 2002.

The Bank of Japan on Wednesday cited “uncertainties regarding overseas economies and global financial markets” as it held interest rates steady and lowered its forecasts for growth and inflation this year. At its monetary board meeting, Japan’s central bank kept the overnight call rate target unchanged at 0.5 per cent, as widely expected, reflecting the growing risk of economic slowdowns in the US and Japan and continued uncertainty in financial markets. The BoJ cut its forecast for real gross domestic product growth for the year to March 2008 from 2.1 per cent in April to 1.8 per cent, and its forecast for consumer price inflation to 0.1 per cent from 0.2 per cent. “To be frank, the downside risks have increased,” Toshihiko Fukui, the BoJ’s governor said.

The uncertainty in financial markets also played a key role in the Fed’s decision-making. The combined risks from tight credit conditions, negative outlook for house prices, and corporate pessimism outweighed the relatively robust performance by the US economy last quarter. US growth was its strongest since the beginning of last year in the third quarter, according to figures on Wednesday which showed gross domestic product rose at an annual rate of 3.9 per cent in the three months to the end of September, significantly better than the 3.1 per cent growth forecast. But David Greenlaw, an analyst at Morgan Stanley, said the underlying figures pointed to weakness ahead, with businesses expected to pare back investment. “This translates into a reduction in the expected growth performance in the fourth quarter,” said Mr Greenlaw. Several economists said, however, that the figures underlined why the central bank should have kept rates on hold, as consumer spending, which makes up about two thirds of the US economy, rose at 3 per cent in the quarter, up from 1.4 per cent in the second quarter. The figures also showed inflation rose unexpectedly to 1.8 per cent from 1.4 per cent, underscoring concerns about price increases among more hawkish central bankers.

Despite signs of reservations among some policymakers, the cut of a quarter-percentage point had been heavily priced in by interest rate futures, with some investors betting on a bolder half-percentage point easing in monetary policy.

Comments

[Howie]

Brad, if you drop the discount rate to match the funds rate the whole banking system would be out of wack! There would be no differentiation of credit risk among private sector banks. The fed would lose control of its balance sheet. Dogs would start sleeping with cats.

[christofay]

Central bank policy set up Kudlow/Cramer, soon it'll be more than 3 out of 5 elevators that don't work. 3rd World I'm a comin'.

[Michael Carroll]

Maybe we will get really lucky and this time around the excess accomodation will help spark a manufacturing investment bubble.

[curmudgeonly troll]

Well, if the Fed is easy the Euro goes to $1.50, and oil goes to $100, and gold goes to $1,000. If they're tight, millions loses their homes to foreclosure and the financial system implodes. Rock, meet hard place.

(I wish I was kidding, but some pretty big financial institutions will collapse, and no one can tell who will be dragged down with them)

The market is calling the Fed's bluff, thinking the Fed talks a tough game, but when push comes to shove they always cut. Doves in hawk's feathers.

[christofay]

Curmudegeon Troll: The too easy leads to 3rd worldism too but we'll get there in a glide path with fewer hard bumps where the Prius rider has to face the inconvenience of walking the stairs rather than ride the elevator to the office.

[christofay]

"Doves in hawk's feathers." epitaph for where the entire nation is at this point

[christofay]

Does the paper economy, continuous easing, drive out the hard economy?

Late Greenspanism creates the Goldilocks economy where paper assets inflate, draws in more Chinese investment in the paper assets, and more industry offshores with concrete investment in China.

[James]

The looting will continue until the middle class is broken, or rises up in a mighty rage.

http://www.nypost.com/seven/10312007/business/sec_eyes_goldman_sachs_good_fo.htm

[ideogenetic]

[ "The job of the Federal Reserve is to take away the punch bowl just when the party starts getting interesting" ] - William McChesney Martin

It seems like Greenspan and Bernanke have altered this philosophy. Nowadays, just when everyone thinks the party is over after trashing the place, the Fed adds another punch bowl down the street- having removed all the stop signs, traffic lights (regulations) and street lights (transparency) along the way.

[jim]

The market dropped 350+ points today. Imagine the fingers that would have been pointed at Bernanke if he hadn't cut. As it was, there was some half-hearted attempt to blame him for not cutting enough.

[Measure for Measure]

With core inflation at 2.1%, yesterday's cut leaves us with a real rate of 2.4%. The long term average (including recessions) is about 1.75%. So policy is still perhaps 1/4 point tight for a weakly growing economy.

Then again Q3's GDP growth of 3.9% was higher than expected. Is it a blip? Will it revise downwards? Or is the nonhousing sector really that strong?

Separately ,does anybody know how does current policy compare with Taylor's rule?

[Barkley Rosser]

It looks like they had inside info on the Citigroup downgrade.