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April 30, 2008 FOMC Decision “The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time ….” Rate Decision: Fed funds rate cut 25 basis points to 2.00%; Discount rate cut to 2.25% The Fed did what was expected today and cut the funds rate another ¼ point. The markets pretty much knew what was coming and what we wanted to see were the changes in the statement. There were some, but the Fed still left itself plenty of wriggle room to do what it pleased. Maybe the biggest difference between today’s statement and the one after the March 18th meeting was the removal of the phrase “downside risks to growth remain”. That implies a lowering in the perception of risk that the economy faces. In addition, instead of saying the “that the outlook for economic activity has weakened further”, the Committee opted to note that “economic activity remains weak”. While that may seem like a small change, in the world of Fed Watching, it is not. Essentially, the Fed seems to be implying that the downturn has plateaued. That may not be the same as saying that growth is coming back, but you have to hit bottom before you start to move forward again. And then there is inflation. The Fed now believes the uncertainty about the inflation outlook is high rather than rising. Again, that may seem picky, but this is the FOMC statement we are talking about and every word is debated. To me, this elevates the concern about inflation. Basically, my view of the statement is that the Fed eased back on its stated concerns about the economy and slightly elevated its worries about inflation. That should not surprise anyone. But by taking relatively small steps, the FOMC may disappoint those who wanted the members to signal that rate cuts were done. The Committee couldn’t do that. It needs the flexibility to act further if there are additional surprises or the economy doesn’t come around as hoped for. Given all the challenges the economy faces, that only makes sense. Going forward, I don’t expect any additional cuts unless there is another crisis. The rebates will likely keep growth positive in the second and especially third quarters. But when it comes down to it, additional rate cuts would not likely accomplish much. The problem is not the level of rates but the availability of funds. Until the credit crunch is eased substantially, the fundamentals of the economy are not going to change significantly. The Fed will likely be concentrating efforts of resolving the illiquidity in the markets and that is what should be done. Joel L. Naroff, Commerce Bank
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