Fed Cuts by 0.75% to 3.5%

Alamred by a weakening U.S. economic outlook and deteriorating credit and financial markets, the Fed cut its target for the federal funds rate Tuesday morning by 75 basis points to 3.5%, coupled with a 75 basis-point cut in the discount rate to 4%. It was the first between-meeting fed funds cut since 9/11. It was also the first 75-basis point cut since 1984.

Equity futures jumped on the news, although they remain sharply down from Friday's close on the heels of two days of massive losses overseas (see: Overseas Markets, U.S. Futures Take Massive Hit).

FOMC Statement

For immediate release

The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent.

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.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

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; Eric S. Rosengren; and Kevin M. Warsh. Voting against was William Poole, who did not believe that current conditions justified policy action before the regularly scheduled meeting next week. Absent and not voting was Frederic S. Mishkin.

In a related action, the Board of Governors approved a 75-basis-point decrease in the discount rate to 4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Chicago and Minneapolis.

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This article has 2 comments:

• Vladimir
  Senkov

  Jan 22 08:49 AM
  "Alarmed by a weakening U.S. economic outlook and deteriorating credit and financial markets . . ."
  I wish this was true. but the timing of this move suggests that the FED was alarmed by the sell off on the markets rather than economic outlook. If this was tied to economic outlook, he would have acted after getting some kind of an economic report, no?
• Long-Short
  Guy

  Jan 22 08:59 AM
  Very perceptive comment!

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