Article - Feds cuts by quarter-point...According to Marketwatch:
https://www.marketwatch.com/news/story/fed-cuts-us-interest-rates/story.aspx?guid=%7bB866D453-9D41-4081-8D61-5FB15C1EFAB1%7d&print=true&dist=printTop
Fed cuts by quarter-point, says that may be enough
Statement suggests policy-makers don't want to give out more medicine
By Greg Robb & Rex Nutting, MarketWatch
Last Update: 3:41 PM ET Oct 31, 2007
WASHINGTON (MarketWatch) -- The Federal Reserve gave the economy its second anti-recession shot in six weeks on Wednesday, cutting short-term interest rates by a quarter-point, but signaled that it wants to hold off doling out any more medicine. The reduction in the federal funds rate to 4.50% is meant to spur the economy through lower borrowing costs. Lower rates should also help Wall Street firms and banks.
In the statement, the Fed explained that it believes the risks of a sharp slowdown are roughly in balance with the risk of higher inflation. Fed watchers call this a "neutral" stance, giving the Fed leeway to move rates in any direction or simply hold rates steady.
In September, the committee said conditions were in such flux that it couldn't weigh the balance of risks going forward. Stock markets sold off on the news of the neutral stance, judging that the Fed could be finished cutting rates.
The FOMC statement bluntly said that the economy was slowing, but also suggested that the committee members believe they're on top of it. This rate cut, along with the September rate cut and other recent moves by the Fed, "should help forestall some of the adverse effects on the broader economy" from the disruption of financial markets and "promote moderate growth over time," the statement said. Read full statement.
The language suggests that the Fed "could be on hold for while," said Joe Carson, head of global economic research at Alliance Bernstein.
The Fed is hinting that it is not contemplating a recession, said Mike Moran, chief economist for Daiwa Securities America. "They see growth moving below potential for a time and gradually moving back," Moran said. Potential growth is roughly calculated around a 2.75% annual growth rate. The FOMC said some inflation risks remain. Core inflation readings have improved modestly, "but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation," the FOMC said. Moran said the statement gave the central bank "maximum flexibility to cut rates again if financial conditions remain unsettled or if it appears the economy is slowing unduly. At the same time, the statement would allow them to reverse course if inflation flares up."
The vote was 9-1, with Kansas City Fed President Thomas Hoenig voting to keep rates steady. Most analysts expected the quarter-point reduction.
In its statement the Fed also said it was cutting the so-called discount rate, what the Fed charges banks for short-term loans, by a quarter point to 5%. Though the economy grew at a 3.9% rate in the third quarter, economists are worried about growth in the fourth quarter and the first part of next year.
The Fed cut rates by a half point only six weeks ago on Sept. 18. At the time, Fed policymakers said the cut was designed "to forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets."
In the weeks that followed, financial markets appeared to believe the Fed would hold rates steady at their two-day meeting this week.
But a steady stream of poor economic indicators, coupled with continued financial market strains and the announcements of more than $30 billion in losses and write-downs by Wall Street brokerage firms from their holdings of sophisticated derivative products linked to subprime mortgages, seemed to convince investors that another rate cut was in order.
Some analysts said Bernanke gave the clearest hint of a rate cut in his speech in New York mid-month.
"The further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year," Bernanke said. Although the votes at the Fed meetings had been unanimous, offering the veneer of unanimity, some nonvoting regional Fed bank presidents are thought to be wary of too many rate cuts out of a concern about the possibility of triggering inflation. Hoenig joined them on Wednesday, casting a vote to hold rates steady.
Several presidents are known to be worried about the so-called "moral-hazard" issue, that the Fed is helping bail out some Wall Street players from their bad bets, thus encouraging more wasteful investments in the future.
These presidents showed their dissatisfaction in a relatively obscure way, by voting against a reduction in the Fed's discount rate in mid-September. See full story.
They did this again before this meeting, with only six of the 12 regional banks requesting a cut in the discount rate. This could show little support for more aggressive action ahead, Moran said.
The voting membership of the FOMC is on a rotating basis, with five of the 12 presidents voting in any given year. Despite some misgivings about inflation, economists said the Fed ultimately didn't want to go against markets that expected a rate cut.
"They didn't want to create any surprises or confusion in financial markets," Moran said.
At some point the Fed might have to push against market expectations, but Fed watchers saw no evidence of this in Fed speeches between meetings.
Greg Robb is a senior reporter for MarketWatch in Washington.
Rex Nutting is Washington bureau chief of MarketWatch.