Economists say the unanimous FOMC decision to cut the Federal funds target rate by 50 basis points came as no surprise. Many said the statement is particularly dovish and points to further rate cuts come December 16.

The accompanying statement said economic activity had decreased markedly from a decline in consumer expenditure, and noted that inflationary pressures are expected to stabilize.

Charmaine Buskas, senior economics strategist at TD Securities, said markets had increasingly come to expect a 50 basis point reduction, even in the aftermath of the half-point cut on Oct. 8, so there was no major surprise in the decision.

"The fact that it was unanimous was also of very little surprise given that credit market considerations are trumping all other concerns at this point," she added. "The Fed is doing what it needs to do to create a sense of stability in credit markets as well as address the downside growth risks."

Matthias Huth, bond market analyst at Landesbank Baden-Württemberg, sees the statement as particularly dovish. "The FOMC statement shows that inflation risks have almost completely diminished. But economic risks are still high," he said. "Therefore the FOMC still sees downside risks to growth even after the long list of measures (interest rate cuts, liquidity measures).



According to Huth, the U.S. economy is already in recession, which will provoke further rate cuts going forward.

In the growth paragraph, the FOMC said: "Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports."

On inflation, the Committee said it expects inflation "to moderate in coming quarters to levels consistent with price stability."

HFE chief U.S. economist Ian Shepherdson called the statement "very downbeat ...with all mention of upside inflation risks expunged from the record." In full approval, he said this is "the first entirely realistic assessment from the Fed in this whole cycle."

The Fed said recent policy actions should "help over time to improve credit conditions and promote a return to moderate economic growth." It noted that "downside risks to growth remain" and that it would "monitor economic and financial developments carefully," taking more action if necessary.

Already looking ahead to the Dec. 16 meeting, economists from RDQ are expecting another 25 basis point rate cut. However, they said cutting the target rate is less important than the liquidity measures set up by central bank.

"In our minds, it is not the level of the funds rate target that matters but the size of the Fed's balance sheet and this has doubled from $0.9 trillion to $1.8 trillion from the end of August to the middle of last week. We would guess that since then, the Fed has added around $100 billion of liquidity via the [Commercial Paper Funding Facility]...We think that this means that the funds rate will trade well below the target rate in November."

There was plenty of market volatility in the minutes following the release, but it was contained to a fairly narrow range. In the initial minutes following the FOMC decision, U.S. equity indexes sold off, with the Dow Jones index declining by nearly 200 points. But within half an hour, the index had returned to its pre-release levels, and an hour after the release the Dow was up 210 points.

Since September 2007, the Federal Reserve has cut the target interest rate by 425 basis points, from 5.25% to 1.00%.

By Patrick McGee and edited by Sarah Sussman
©CEP News Ltd. 2008