Fed Cuts to 2%

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

The FOMC announced a much-anticipated 25 BP cut to its fed funds target rate to 2%. It also lowered the discount rate by 25 basis points, to 2.25%. The latter decision was unanimous, while the former decision was endorsed by 8 of the Fed's 10 voting governors; Richard Fisher and Charles Plosser preferred no change.

In its statement, the Fed stressed the dual tensions of weak economic activity and credit market stress, combined with notable inflationary pressure from both energy and commodity prices and across broad economic indicators. Speaking on CNBC, Pimco's Bill Gross noted the neutrality of the Fed's statement, which leads him and others to believe interest rates could stay put at 2% for the foreseeable future.

Equity markets continue to move higher. Thirty-year Treasurys are flat on the day.

Following is the text of the FOMC press release:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 2 percent.

Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.

Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred no change in the target for the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 2-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Atlanta, and San Francisco.