In response to the global equities sell-off and the likely pressure on U.S. stock markets when they open later today, the U.S. Federal Reserve slashed the Fed Funds rate by 75 basis points to 3.5% Tuesday morning.
The Fed said:
The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.
While the release said that "Appreciable downside risks to growth remain," it also mentioned that the committee expects "inflation to moderate in coming quarters." No doubt, the Fed has made its choice for now, preferring to stimulate the economy despite risking higher inflation. With lower oil prices -- caused by fears of lower demand as the economy slows down -- the Fed may have less to worry about inflation.
Has this move been enough? So far, futures indicate it may have been -- at least for today -- as their losses aren't as steep as before the announcement. Even with this Fed cushion, I'd expect the session to be bumpy.
Why do we have a weak dollar?
Holiday hiring slow for retailers
Closing Bell: What sell-off? (AIG, ABK, EPR, MBI, JAVA, ORCL, ERTS)
Reader Comments (Page 1 of 1)
1-22-2008 @ 3:32PM
samuel said...
Don't forget - if the federal funds rate is now 3.5% and the yearly inflation rate is 4.1% (if you count core inflation as the real thing - which I don't), then we have an effective rate of -0.6%, which, I believe, means we're losing money on loans made by the central bank?
Also, fundamentals are bad. Food and minerals prices are too high. The worldwide crisis of confidence could provoke a common strategy by OECD and BRIC countries.
Which could give us a common project to improve acreage of food available on the market, also more recycling on minerals.
These two problems are the one who are provoking panic on the markets.