The Federal Reserve Takes the Federal Funds Rate to 4.25%

From Mark Thoma:

Economist's View: The FOMC Cuts the Federal Funds Rate to 4.25%: No real surprise - the Fed lowered the federal funds rate by a quarter point - but the details are more interesting.

*The Fed believes that growth is slowing and that strains on financial markets have increased recently. *There is still some inflation risk, but it is not emphasized as much as in previous statements. *There was one dissent, with Boston president Eric Rosengren preferring a more aggressive half point cut (the vote was 9-1, there are two open positions on the Committee). *The Fed dropped its balanced risk statement and now says it will act as necessary. *Only seven banks requested a quarter point decrease in the discount rate. Assuming that Boston requested a half point cut, that leaves four banks (Dallas, Kansas City, Minneapolis, and San Francisco) who either requested no cut, or a half point cut (or perhaps some other action, though that's unlikely). My guess is three requested no cut (Dallas, Kansas City, and Minneapolis), and one a half point cut (San Francisco), but there's no way to know for sure until the minutes are released. [Update: The WSJ's Economics blog sees it the same way.]

Here's the Press Release:

Press Release Release Date: December 11, 2007 For immediate release

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/4 percent.

Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.

Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; and Kevin M. Warsh. Voting against was Eric S. Rosengren, who preferred to lower the target for the federal funds rate by 50 basis points at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 4-3/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, and St. Louis.

Comments

[Tony Trepanier]

If the economy is showing real sign of slowing with moderate inflation why not cut rates more to try to hold off a recession?

[pjgoober]

Tony, cutting rates too much can stimulate inflation. The Fed has to walk a fine line between keeping inflation low and stimulating the economy. Also, cutting rates puts downward pressure on the dollar.

[pjgoober]

Tony, cutting rates too much can stimulate inflation. The Fed has to walk a fine line between keeping inflation low and stimulating the economy. Also, cutting rates puts downward pressure on the dollar.

[christofay]

It was the last bout of cutting rates to stimulate the economy so that George could be elected that got us into this mess in the first place.

[vt codger]

Is cutting rates going to help or hinder things much? Seems to me like we are in a kind of abnormal state where the perceived ability of the borrower to repay is far more important to (sane) lenders than a quarter point of interest. And, aren't lower rates going to negatively affect the already severely eroded dollar? Is the Fed futilely pushing at bolts with a screwdriver because they don't have a wrench but feel like they ought to be doing something?

[anne]

http://krugman.blogs.nytimes.com/2007/12/11/its-getting-darker/

December 11, 2007

It’s Getting Darker
By Paul Krugman

Recession talk increases. Dick Berner of Morgan Stanley tends to be cautiously optimistic; when he says *

"A mild recession is now likely: We expect domestic demand to contract by an average 1% annualized in each of the next three quarters, no growth in overall GDP for the year ending in the third quarter of 2008 and corporate earnings to contract by 5-10% over that longer period."

that’s an indication that things look pretty bleak.

And Macroeconomic Advisers ** thinks that GDP is already shrinking.

Can we get Alan Greenspan to return his book royalties?

Update: A majority of Americans thinks we’re already in recession. *** And there’s some chance they might be right.

* http://www.morganstanley.com/views/gef/archive/2007/20071210-Mon.html#anchor5880

** http://blogs.wsj.com/economics/2007/12/11/macroeconomic-advisers-economy-now-shrinking/

*** http://thinkprogress.org/2007/12/11/majority-of-public-believes-us-is-in-a-recession/

[Nescio]

The Fed is choosing the wrong trajectory. IMHO, it should raise the Fed Funds rate and deflate the asset price bubble in commodities, housing and many other assets. The current problems in the financial markets are the result of a disastrous monetary policy by the FOMC in the past decade which is basically to be agnostic about asset price inflation, but to drop the Fed Funds rate as soon as asset prices fall. Its dual mandate should be replaced with a single mandate: maintaining a stable level of consumer AND asset prices, with the inflation rate being transparent (no hedonics or substitution effects) and being determined by a separate, politically independent body. Such a policy will be painful, but its current policy of always shifting focus from its mandate of ensuring stable prices to its mandate of ensuring maximum employment levels (=recession avoidance) has proven not to work properly. I suggest Congress should copy the statutes of the ECB and the Reserve Bank of Australia and give the Fed a fully new inflation-focused mandate. .

[kharris]

Nescio,

Maintaining stable consumer and asset market prices is a double mandate, since consumer and asset prices are nto the same things There are also considerable divergences in price trend among asset classes, so as a practical matter, one side of the mandate is gonna take some really arbitrary decision to impliment. Those decisions, being arbitrary, are likely to lead to lots of surprises along the way. Only tremendous good look would allow the Fed to manage both sets of prices.

And I'm not sure standard economic theory has much good to say about centrally managed asset prices.

[Nescio]

kharris,

The Federal Reserve currently follows an asynchronous asset price inflation fighting policy, because it reacts to the risks of falling prices of real estate and debt instruments (ABS, CDO's and the like) by lowering the Fed Funds rate. So why was it not the other way around, when house prices in many metropolitan regions were rising by double digit numbers and the interest rate differential between treasury securities and securities of lesser quality narrowed considerably ? Yes, there are considerable divergences among asset classes, but the same is true for consumer prices (think of electronics, food, et cetera). IMO, it would be best to establish an independent body which could devise a very broad price index, a kind of Wilshire 5000 index of both asset and consumer prices, to replace the current official inflation measures.

[christofay]

We don't do capital investment in this country anymore, well, that's an exaggeration. I just don't know of any new factories going up that aren't tied to crony capitalism.

In what way is consumer purchasing of inflating assets a consumer rather than an asset purchase? The aim of the internet boom was to inflate stock prices on hype; the push was to have the weight of money of retail investors to pull up valuations. The aim of consumer over-investing in housing was to push the consumer market along. Literally hundreds of billions of dollars were withdrawn through mortgages in the ATM machine to fuel increase consumer spending. You can not label a mortgage used for immediate consumption an "asset."

In contemporary finance system America, there are the conned which is the retail tranch of the investing public, the unknowing conned with shoelaces tied together McCain, Delong, citibank and BS, and the in-on-the-con Goldmine Sachs, Paulsen, Mozillo, and Guiliani. I don't know where Bush fits in there, you quibble about that. Cheney is definitely in-on-the-con, any career bureaucrat who amasses a $500 mil fortune is con-in.