The US Federal Reserve has wisely decided to cut its federal funds rate and its discount rate by 25 basis points that is 1/4 of one percent.Their press release appears below.
The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/4 percent.Given the underlying low rate of inflation the real rate of interest at the base rate as opposed to the rate that retail customers actually pay is a minimum of 2 % points probably still too high given the underlying business cycle and the depth of the financial fallout from the asset backed commercial paper crisis.It is revealing that one dissenting member of the FOMC Eric Rosengren favoured lowering the rate 50 basis points. Events may well vindicate his judgement.Rosengren chief executive officer of the Boston Fed is a heavily published economist with numerous articles on financial bubbles, the Japanese deflation and related financial market issues. This makes his dissent all the more intriguing.
Nevertheless Bernanke has at least acted in the right direction correctly anticipating that the slowdown is gathering energy as pessimistic expectations, retrenchment and tight money take their toll on spending and investment behaviour.
Federal Reserve press release Dec. 11, 2007
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.
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.
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.
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; and Kevin M. Warsh. Voting against was Eric S. Rosengren, who preferred to lower the target for the federal funds rate by 50 basis points at this meeting.
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.
2007 Monetary Policy Releases
Last update: December 11, 2007
No comments:
Post a Comment