Cannon Trading Futures Blog: Daily Support and Resistance Levels

DJ Fed Cuts Fed Funds Rate 25BPs; Cites Econ Uncertainty
12/11/07 13:16

By Brian Blackstone and Henry J. Pulizzi
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--The Federal Reserve on Tuesday lowered its key lending rate a third-straight time and left the door open to future cuts, an about-face for officials who suggested recently that further easing was off the table.
The Fed also cut the rate it charges banks that borrow from the Fed, but by less than expected, an indication they don't see recent financial strains as a serious threat to the expansion.
As expected, the Federal Open Market Committee voted 9-1 to reduce the federal funds rate to 4.25% from 4.5%, its third-straight reduction since September totaling 100 basis points. Boston Fed President Eric Rosengren dissented, preferring a half-point cut.
It also dropped its previous assertion that growth and inflation risks were roughly balanced, opting instead for an open-ended view, and pledged to "act as needed" to keep the economy growing and inflation in check.
The Fed cut the discount rate it charges banks that borrow directly from the Fed by 25 basis points to 4.75%.
"Incoming information suggests that economic growth is slowing," the FOMC said in a statement, reflecting the "intensification" of the housing slump and slower business and consumer spending.
Financial strains, meanwhile, "have increased," the Fed said.
Still, the Fed said Tuesday's action, combined with previous rate cuts "should help promote moderate growth over time," suggesting officials may not see the need for future cuts.
The Fed wasn't expected to be in this position a few weeks ago, when it sent multiple signals that the Oct. 31 rate cut would be the last of the cycle. In a statement accompanying that decision, officials said inflation and growth risks were roughly balanced, which is usually an indication that the Fed thinks it's finished.
That message was driven home by several officials early last month, most pointedly by Fed Governor Randall Kroszner, who said on Nov. 16 that "the current stance of monetary policy should help the economy get through the rough patch during the next year."
But that was then.
Since mid-November, credit market conditions -- as reflected in Libor rates and asset-backed commercial paper -- eroded considerably. That in turn raised concerns about the availability or credit at the end of the year when financing pressures tend to intensify.
Yet if Tuesday's outcome wasn't envisioned by Fed officials a few weeks ago, it certainty was by Wall Street, which never wavered from its view that the Fed would have to lower rates again to shore up credit markets and address the housing slump.
Around two weeks ago the Fed seemed to blink, with Fed Vice Chairman Donald Kohn and then Chairman Ben Bernanke highlighting the economy's vulnerabilities, which Wall Street took as a clear sign of more rate cuts.
San Francisco Fed President Janet Yellen, a key voice on monetary policy, summed up the change of heart this way last week: "Since the October FOMC meeting, financial conditions have deteriorated, and we have seen some unexpected softening in the economic data."
Yet recent data suggest that while the economy is slowing, it isn't doing so it a way that's too surprising to the Fed, suggesting Tuesday's cut was aimed more at stabilizing financial conditions. Gross domestic product is only expected to grow around 1% to 1.5% this quarter, but that's following robust 4.9% growth in the third quarter. Fed officials have said in recent weeks that they expect a sluggish fourth quarter.
A government report last week showing 94,000 new jobs were created last month eased concerns that consumers might pull back spending in the face of higher energy prices and lower home values.
The inflation outlook was little changed since Oct. 31. Core inflation has improved "modestly," the Fed said but 'some inflation risks remain" from higher energy and commodity prices and other factors.

-By Brian Blackstone and Henry J. Pulizzi, Dow Jones Newswires; 202-828-3397; brian.blackstone@dowjones.com and henry.pulizzi@dowjones.com
(Jeff Bater and Elizabeth Price contributed to this article)

(END) Dow Jones Newswires
December 11, 2007 14:16 ET (19:16 GMT)
Copyright (c) 2007 Dow Jones & Company, Inc.

Keywords: ENERGY, FINANCIAL ECONOMY, CURRENCY, GENERAL, FINANCIAL, FINANCIAL CURRENCY

----------------------------
Dow Jones
Powered by CQG
http://www.cqg.com