Wednesday’s Wash

The Federal Reserve elected to cut the Federal Funds rate 25bps from 4.50% to 4.25%. 

Changes in the statement include a much clearer acknowledgement of economic weakness:  Last month – “…the pace of economic expansion will likely slow in the near term.”  This month the Fed highlighted the deteriorating conditions beyond the financial markets, “Incoming information suggests that economic growth is slowing, reflecting intensification of the housing correction and some softening in business and consumer spending.” 

The Fed maintains concern of upward risks to inflation.  “Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation.”

Last month the committee judged the “the upside risks to inflation roughly balance the downside risks to growth.”  This month the Fed has clearly revised their view on economic pressures.  “Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation.”

The Fed is ready and willing to take further action with a clear easing bias in place. “The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.”

In the votes last month there was dissension among the ranks; Thomas Hoenig voted against the 25bp cut, he preferred no change in the FF rate in October.  This time around there is still dissension; Eric Rosengren preferred a 50bps cut. 

Bottom Line: The Fed is not done yet; a clear easing bias in place, the Fed expresses genuine concern of further fallout in the real economy (beyond the wounds in the financial system).  These are uncertain times and neither a quick recovery from housing nor a banking system self-help solution has come to fruition.  The Fed will continue to monitor the slowdown and will cut rates further to maintain economic growth.