FOMC cuts interest rates by 0.50% to 3.00%
31 January 2008
Following last week’s FOMC intra-meeting emergency rate cut of 0.75%, the US Federal Reserve has decided to cut the Fed Funds rate by a further 0.5% to 3.0% last night. Since September the rate has been slashed by a massive 2.25%.
The key structural weaknesses within the US economy persist, with risks to economic growth firmly to the downside. Despite conditions within in the inter-bank markets having eased somewhat, the broader economic picture in the US continues to deteriorate, particularly in the housing sector. The Fed commented that inflation should moderate due to the slowing economy, leaving the door open for further cuts in the spring.
By taking this aggressive action, the FOMC have abandoned the gradualist approach to policy making. Bernanke has certainly been tested since taking over from Greenspan and, by taking such action, his credibility is on the line. Will it have delivered the desired effect and reverse the slowdown, or will this action cause greater concern that the US economy is going to experience a deeper slowdown than expected? For the time being, enough action has been taken to wait and see.