DJ Fed Cuts Fed Funds Rate 25BPs To 2%; Pause Likely Ahead
DJ Fed Cuts Fed Funds Rate 25BPs To 2%; Pause Likely Ahead
04/30/08 13:16
By Brian Blackstone and Henry J. Pulizzi
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--The Federal Reserve on Wednesday lowered its key interest rate by one-quarter percentage point but also signaled the seven-month easing cycle may be coming to an end.
The cut, the seventh since September, was modest by recent standards, reflecting upward pressure on inflation from higher food and energy prices and the weak dollar. Those trends suggest further rate cuts might do more harm than good in the months ahead.
The Federal Open Market Committee voted 8-2 to lower its target for the fed funds rate at which banks lend money to each other by 0.25 percentage point to 2%, its lowest since November 2004.
It lowered the discount rate charged to banks and brokers that borrow directly from the Fed by 0.25 percentage point to 2.25%.
The moves were widely expected, according to a Dow Jones Newswires survey.
Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser dissented for a second-straight meeting, this time favoring no change in rates. It's the sixth-straight dissent Fed Chairman Ben Bernanke has faced on a fed funds decision.
"Economic activity remains weak," the Fed said, citing "subdued" spending and a "further" softening in labor markets. Markets "remain under considerable stress," the Fed said.
Barring an unforeseen collapse in the economy or financial markets, rates will probably stay where they are for several months at least, though the Fed left the door open to more cuts if needed.
"The substantial easing of monetary policy to date...should help to promote moderate growth over time," the Fed said. It dropped its previous references to downside growth risks. It said it would act as need to promote growth, dropping the reference to "timely" action.
Fed watchers usually interpret reference to cumulative actions as a sign that officials are wary to lower rates further.
The Fed tried to send similar signals in the past and failed, most notably in October when it said - prematurely - that growth and inflation risks were roughly balanced.
The Fed warned that inflation uncertainty "remains high" and that it will monitor inflation closely.
In their policy statement, officials nodded for a second-straight time to rising inflation expectations.
Policy Very Aggressive In Early '08
Though brief from a calendar standpoint, the easing cycle has been very aggressive, slashing the fed funds rate 3.25 percentage points since September. Two percentage points of that came during a two-month period between mid-January and mid-March.
At its previous meeting on March 18, the FOMC cut the fed funds rate 0.75 percentage point. Officials stressed their concerns about the economy in the minutes of that meeting. Some officials even worried that "falling house prices and stresses in financial markets could lead to a more severe and protracted downturn in activity than currently anticipated," according to the minutes.
During the January-March period, the Fed also created new credit lending facilities, expanded use of the discount window to include investment banks and helped engineer the rescue and proposed takeover of Bear Stearns Cos. (BCS) by JPMorgan Chase & Co. (JPM) - drawing on powers it hadn't used in decades to channel hundreds of billions of dollars into strained markets.
The mix of rate cuts and credit initiatives appears to have at least averted what officials have referred to as a negative "feedback loop" when a weak economy causes big disturbances in financial markets which then make the economic downturn even worse.
And the economy, while clearly very weak, appears to have escaped the "severe" scenario outlined in the March Fed minutes. Gross domestic product grew 0.6% during the first quarter, the Commerce Department said Wednesday. And many forecasters see some lift in the second quarter from tax rebate checks. By midyear, the housing sector should at least stop subtracting as much as it has from growth in recent quarters.
Against that backdrop, some observers said the Fed could have even justified holding rates steady Wednesday.
But the economy still faces many headwinds, and any recovery looks more like a slow 'U' than a rapid 'V' shape. Housing is unlikely to rebound before 2009 at the earliest, and employment declines - along with soaring food and gasoline prices - have weighed on consumer confidence and spending. That leaves exports, aided by the weak dollar, as one of the sole sources of support for the economy.
So even if the Fed stops lowering rates, it's unlikely to start raising them anytime soon.
-By Brian Blackstone and Henry J. Pulizzi; Dow Jones Newswires; 202-828-3397; brian.blackstone@dowjones.com and henry.pulizzi@dowjones.com
(Maya Jackson-Randall and Jeff Bater contributed to this article)
(END) Dow Jones Newswires
April 30, 2008 14:16 ET (18:16 GMT)
Copyright (c) 2008 Dow Jones & Company, Inc.
04/30/08 13:16
By Brian Blackstone and Henry J. Pulizzi
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--The Federal Reserve on Wednesday lowered its key interest rate by one-quarter percentage point but also signaled the seven-month easing cycle may be coming to an end.
The cut, the seventh since September, was modest by recent standards, reflecting upward pressure on inflation from higher food and energy prices and the weak dollar. Those trends suggest further rate cuts might do more harm than good in the months ahead.
The Federal Open Market Committee voted 8-2 to lower its target for the fed funds rate at which banks lend money to each other by 0.25 percentage point to 2%, its lowest since November 2004.
It lowered the discount rate charged to banks and brokers that borrow directly from the Fed by 0.25 percentage point to 2.25%.
The moves were widely expected, according to a Dow Jones Newswires survey.
Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser dissented for a second-straight meeting, this time favoring no change in rates. It's the sixth-straight dissent Fed Chairman Ben Bernanke has faced on a fed funds decision.
"Economic activity remains weak," the Fed said, citing "subdued" spending and a "further" softening in labor markets. Markets "remain under considerable stress," the Fed said.
Barring an unforeseen collapse in the economy or financial markets, rates will probably stay where they are for several months at least, though the Fed left the door open to more cuts if needed.
"The substantial easing of monetary policy to date...should help to promote moderate growth over time," the Fed said. It dropped its previous references to downside growth risks. It said it would act as need to promote growth, dropping the reference to "timely" action.
Fed watchers usually interpret reference to cumulative actions as a sign that officials are wary to lower rates further.
The Fed tried to send similar signals in the past and failed, most notably in October when it said - prematurely - that growth and inflation risks were roughly balanced.
The Fed warned that inflation uncertainty "remains high" and that it will monitor inflation closely.
In their policy statement, officials nodded for a second-straight time to rising inflation expectations.
Policy Very Aggressive In Early '08
Though brief from a calendar standpoint, the easing cycle has been very aggressive, slashing the fed funds rate 3.25 percentage points since September. Two percentage points of that came during a two-month period between mid-January and mid-March.
At its previous meeting on March 18, the FOMC cut the fed funds rate 0.75 percentage point. Officials stressed their concerns about the economy in the minutes of that meeting. Some officials even worried that "falling house prices and stresses in financial markets could lead to a more severe and protracted downturn in activity than currently anticipated," according to the minutes.
During the January-March period, the Fed also created new credit lending facilities, expanded use of the discount window to include investment banks and helped engineer the rescue and proposed takeover of Bear Stearns Cos. (BCS) by JPMorgan Chase & Co. (JPM) - drawing on powers it hadn't used in decades to channel hundreds of billions of dollars into strained markets.
The mix of rate cuts and credit initiatives appears to have at least averted what officials have referred to as a negative "feedback loop" when a weak economy causes big disturbances in financial markets which then make the economic downturn even worse.
And the economy, while clearly very weak, appears to have escaped the "severe" scenario outlined in the March Fed minutes. Gross domestic product grew 0.6% during the first quarter, the Commerce Department said Wednesday. And many forecasters see some lift in the second quarter from tax rebate checks. By midyear, the housing sector should at least stop subtracting as much as it has from growth in recent quarters.
Against that backdrop, some observers said the Fed could have even justified holding rates steady Wednesday.
But the economy still faces many headwinds, and any recovery looks more like a slow 'U' than a rapid 'V' shape. Housing is unlikely to rebound before 2009 at the earliest, and employment declines - along with soaring food and gasoline prices - have weighed on consumer confidence and spending. That leaves exports, aided by the weak dollar, as one of the sole sources of support for the economy.
So even if the Fed stops lowering rates, it's unlikely to start raising them anytime soon.
-By Brian Blackstone and Henry J. Pulizzi; Dow Jones Newswires; 202-828-3397; brian.blackstone@dowjones.com and henry.pulizzi@dowjones.com
(Maya Jackson-Randall and Jeff Bater contributed to this article)
(END) Dow Jones Newswires
April 30, 2008 14:16 ET (18:16 GMT)
Copyright (c) 2008 Dow Jones & Company, Inc.
Keywords: ENERGY, FINANCIAL ECONOMY, CURRENCY, GENERAL, FINANCIAL, FINANCIAL CURRENCY
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