For the First Time Since 1997, the Fed Is More Dovish than Brad DeLong
I wouldn't have done it. I would have kept the FF rate at 4.75% and dropped the discount rate to 4.75%. But it is a marginal change...
Eoin Callan, Michael Mackenzie, and Daniel Pimlott report for the Financial Times:
FT.com / World - Fed cuts rates by another quarter point: The Federal Reserve cut US interest rates by a quarter point to 4.5 per cent on Wednesday in a bid to protect the American economy against the risks from the housing slump and credit squeeze. The second successive rate cut by the central bank follows an accelerated decline in the housing market that has confirmed some of central bankers’ worst fears and fostered fresh jitters in financial markets.
Disappointing earnings in the banking sector and downbeat corporate forecasts have added to concerns about a slowdown in activity, despite a strong overall economic performance last quarter. “This one was for the banks. The cut is intended to keep money flowing freely and stem the risk of spillover from the financial markets to the real economy,” said Jeoff Hall, an economist at Thomson Financial. Financial stocks have lagged the overall market as the third quarter earnings season has delivered the first negative quarter of profits year-over-year for S&P 500 companies since 2002.
The Bank of Japan on Wednesday cited “uncertainties regarding overseas economies and global financial markets” as it held interest rates steady and lowered its forecasts for growth and inflation this year. At its monetary board meeting, Japan’s central bank kept the overnight call rate target unchanged at 0.5 per cent, as widely expected, reflecting the growing risk of economic slowdowns in the US and Japan and continued uncertainty in financial markets. The BoJ cut its forecast for real gross domestic product growth for the year to March 2008 from 2.1 per cent in April to 1.8 per cent, and its forecast for consumer price inflation to 0.1 per cent from 0.2 per cent. “To be frank, the downside risks have increased,” Toshihiko Fukui, the BoJ’s governor said.
The uncertainty in financial markets also played a key role in the Fed’s decision-making. The combined risks from tight credit conditions, negative outlook for house prices, and corporate pessimism outweighed the relatively robust performance by the US economy last quarter. US growth was its strongest since the beginning of last year in the third quarter, according to figures on Wednesday which showed gross domestic product rose at an annual rate of 3.9 per cent in the three months to the end of September, significantly better than the 3.1 per cent growth forecast. But David Greenlaw, an analyst at Morgan Stanley, said the underlying figures pointed to weakness ahead, with businesses expected to pare back investment. “This translates into a reduction in the expected growth performance in the fourth quarter,” said Mr Greenlaw. Several economists said, however, that the figures underlined why the central bank should have kept rates on hold, as consumer spending, which makes up about two thirds of the US economy, rose at 3 per cent in the quarter, up from 1.4 per cent in the second quarter. The figures also showed inflation rose unexpectedly to 1.8 per cent from 1.4 per cent, underscoring concerns about price increases among more hawkish central bankers.
Despite signs of reservations among some policymakers, the cut of a quarter-percentage point had been heavily priced in by interest rate futures, with some investors betting on a bolder half-percentage point easing in monetary policy.
