Tuesday, January 22, 2008

Panic City


Today the Fed reduced the federal funds rate by 3/4% (http://www.federalreserve.gov/newsevents/press/monetary/20080122b.htm) and justified its actions with the following statement:

“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......”

This was an unusually large cut enacted between regularly scheduled meetings. It also followed immediately on the heels of big losses in overseas stock markets.

There’s a sense of panic in the air. It’s instructive that Wall Street opened sharply lower despite the Fed’s move. It’s now about 1pm Eastern Time and U.S. stock markets still have three hours of trading before they close. The S&P 500 is down only ten points and could close higher for the day. Overall, however, the week has not started well.

© 2008 Michael B. Lehmann

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