FOMC cut interest rates by 0.25% to 2.00%
30 April 2008
As expected, the US Federal Reserve elected to cut its Fed Funds rate by 0.25% to 2.00% at yesterday’s meeting after the latest deterioration in US housing and financial markets. The Fed has now cut overnight interest rates by 3.25% since September, in an attempt to prevent the credit squeeze and housing slump tipping the US economy into a deep recession.
The Federal Reserve’s statement gave the impression that the need and urgency for further cuts had eased slightly, however they are still concerned about the faltering economy. "Recent information indicates that economic activity remains weak," it said. "Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters." Eight members of the rate-setting committee, including its chairman Ben Bernanke, voted for the rate cut, with two members, Fisher and Plosser voting for no change.
However, with upside inflationary pressures persisting due to a combination of rising commodity prices and a weak US Dollar, the Fed are looking increasingly restricted in terms of further monetary easing going forward. While most of the Fed believes that inflationary pressures will moderate in the later half of the year, they may feel reluctant to lower rates further in the near term.