Tuesday, January 22, 2008

Fed cuts rates in "emergency" move

The Federal Reserve has cut the fed funds rate to 3.5 percent, down three quarters of a point from its previous level of 4.25 percent. The discount rate was also lowered to 4 percent.

Here's more from Reuters:

Tuesday's rate cut, a week before Fed policy-makers convene for a regularly scheduled meeting on Jan. 29-30, was eye-popping in the context of the Fed's usual gradualist approach.

But the Fed still needs to do more, traders and analysts said.

"The market is telling the Fed that they have to ease more," said Martin Mitchell, head of government trading at Stifel Nicolaus & Co in Baltimore.

The Fed's biggest easing in the funds rate since October 1984 occurred while U.S. Treasury Secretary Henry Paulson called for a government stimulus package, which some analysts dismissed as being too small to revive a deteriorating economy.

In fact, more Wall Street analysts are predicting a U.S. recession this year. UBS became the latest firm to forecast the U.S. economy would contract in the first half of the year.

On one side of the fence, the traders and market participants who have become accustomed to easy money conditions are calling for more. Focused on the short term, and the steadily deteriorating condition of inancial markets, they cry out to be saved by central bank liquidity.

On the other side of the fence, are those who recognize the longer-term impact of these easy-money stimulus moves. In a word: inflation.

Even if it helps in the short run, easier monetary policy now would hurt the economy in the long run by weakening the dollar and boosting inflation, said Haag Sherman, managing director at Salient Partners in Houston.

"Ultimately these rate cuts will be self-defeating," Sherman said. "They are going to prove inflationary and bad for the dollar."

Additional commentary and video on the Fed move and the economy from Bloomberg; plus, more news of stocks taking it on the chin over in the Asia-Pacific region.

And if you'd like more perspective on the effectiveness of these Fed moves, please see our post on the last series of Fed rate cuts. Bob Hoye of Institutional Advisors makes some interesting points on the direction of short-term interest rates and the economy.