The Federal Reserve wants to be ahead of the curve. They no longer want to be criticized for doing too little, too late and for that reason, they cut interest rates by 50bp today to 3.00 percent. In a little more than week, the Federal Reserve has lowered interest rates by a total of 125bp, which is more than all of the rates cuts that they made last year combined.
They are still worried about financial market conditions, tight credit, the stability of the labor market and a further contraction in housing. Although they believe that their efforts thus far will offset some of the downside risks to growth, the tone of the FOMC statement indicates that this rate cut will not be their last. Inflation is not a problem at the moment; they expect it to moderate in the coming quarters.
Before this easing cycle is over, we expect the Federal Reserve to bring US interest rates down to at least 2.50 percent. If the economy does not improve, interest rates could realistically return to 1.00 percent. As a result, the US dollar will not escape further weakness.
Comparing the FOMC statements **New Language Highlighted
January 22, 2008
The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent.
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.
By Kathy Lien, Chief Strategist of DailyFX.com
