Fed Cuts Again

 |  Includes: DIA, IEF, QQQ, SPY
by: SA Eli Hoffmann

The Federal Reserve said Tuesday it has decided to lower its key fed funds target rate by 0.25%, to 4.25%, a move widely expected by economists in light of ongoing turbulence in the credit and residential mortgage markets. The discount rate -- at which banks borrow from the Fed -- moved down 0.25% as well to 4.75%. The Fed has now cut overnight rates by 100 basis points since mid-September.

"Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending," it said. The Fed stopped short, however, of dropping inflationary concerns from its agenda. "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." Noteworthy is the missing "balance of risk" statement from last meeting.

Equity markets were down sharply in the minutes following the announcement (full story). Before today's cut, CBOT futures predicted 100% odds of a further cut in January. After the announcement, the odds fell to 94%. The S&P 500 fell 24 points to 1495. Treasurys rallied.

Nine of ten FOMC governors voted for the move. Boston Fed Governor Eric S. Rosengren would have preferred to lower the target for the federal funds rate by 50 basis points.

The move comes despite the Fed having discouraged the concept of more rate cuts at its previous meeting on Oct. 31 when it said, "After this action, the upside risks to inflation roughly balance the downside risks to growth," a view many, including Vice Chairman Donald Kohn, say changed: "The increased turbulence of recent weeks partly reversed some of the improvement in market functioning over the late part of September and in October," he said on Nov. 27.

"They pretty much tried to draw a line in the sand by going to a balanced-risks statement at the last meeting, and now the world's changed," economist Keith Hembre, who used to work at the Fed, said.

The rate cut had been widely predicted among economists: 115 out of 124 economists surveyed by Bloomberg predicted the move correctly.

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