Fed cuts rate 50 basis points

2:35 pm Sept. 18, 2007

The Federal Reserve open market committee under the leadership of Chairman Ben Bernanke has very sensibly cut the federal funds rate by 50 basis points.
The announcement follows below courtesy of the Federal Reserve.



2007 Monetary Policy Releases
PrintPress Release
Release Date: September 18, 2007

For immediate release

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4-3/4 percent.

Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally.   Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.  
Readings on core inflation have improved modestly this year.   However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.  

Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook.   The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; Eric Rosengren; and Kevin M. Warsh.  

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 5-1/4 percent.   In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, St. Louis, Minneapolis, Kansas City, and San Francisco.


2007 Monetary Policy Releases

Last update: September 18, 2007


This dramatic action hopefully will help stabilize the financial markets and moderate panic and recessionary impulses that would flow from this. Here in Canada the ball is clearly in Mr. Dodge's court to follow suit. The Canadian dollar presently at 98.68 cents US is heading towards parity and the US Fed's move will only accelerate this.The last time the Canadian dollar passed parity with the US dollar in 1976 it peaked at about 1.07 to the US dollar. If the bank doesn't act look for a repeat of a similar scenario and a severe compression of Canadian manufacturing exports to the US.

The initial impact of the rate cut has been quite favourable as stock and financial markets moved sharply upward in todays trading.The bulls and contrarians of   of the last few weeks were rewarded for their prescience and optimism while the bears who sold short had to scramble. In this respect the Financial Times ran a very interesting analsysis that showed it was the powerful hedge funds that had triggered the sell off in August and early September while the smaller retail investor had not panicked and wisely bought into good values while the slide was underway.The Guardian for its part had an excellent short potted history of financial crises drawn from leading academic sources like Kindleberger, Galbraith, and Schumpeter.

In Britain largely because of the statement by the Prime Minister that the Government would guarantee depositers their funds the Northern Rock's shares recovered somewhat and queues outside the bank's branches largely disappeared as calm returned .We shall see what tomorrow brings .

But a good old fashioned banking crisis is, if nothing else, a fabulous educational tool provided one survives it.