Tuesday, December 11, 2007

Fed Cuts

From the Federal Reserve:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/4 percent.

Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.


Translation: The economy is not in a good place. Moreover, it doesn't look like things will get better anytime soon.

Readings on core inflation have improved modestly this year, but 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.


Translation: Food and energy prices are now on our radar screen (thank God). This is not a good development. In fact, this might be what prevented the Fed from taking more aggressive action.

Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.


Translation: we have no idea what in the world is going to happen. This is another way of saying it doesn't look good.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 4-3/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, and St. Louis.


Translation: The credit markets are still not in good shape. So we're going to throw more liquidity out there because we don't have much else we can do.

What's missing from this statement? There is no mention that things are going to get better. There is nothing to the effect that "we expect growth to return to X level in a few months." There is no mention of "moderate growth". Instead, there is a lot of negative talk about the economy.

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