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Fed Holds On to Some Cards
by Jeffrey Cane
Jan 2 2008
Jan 2 2008
Minutes point to another rate cut this winter.
Federal Reserve policymakers left the door open for another cut in interest rates when they decided on a quarter-point reduction on December 11, minutes released today show.
With the economic outlook "unusually uncertain," Fed policymakers decided at their last meeting to refrain from assessing the balance of risks of slower growth and higher inflation. Instead, "the committee agreed on the need to remain exceptionally alert to economic and financial developments and their effects on the outlook, and members would be prepared to adjust the stance of monetary policy if prospects for economic growth or inflation were to worsen."
The Federal Reserve's benchmark interest rate is now at 4.25 percent after three rate cuts since September. The Fed next meets on January 29 and 30, and expectations are high that the Fed will cut another quarter point. Federal funds futures contracts traded on the Chicago Board of Trade today pointed to a 76 percent likelihood of a quarter-point reduction by February.
In general, the minutes confirmed that the Fed is nearly unanimous in sharing the point of view outlined in speeches by Donald Kohn, the vice chairman of the Fed, and Ben Bernanke, the Fed chairman, more than a month ago. The two men focused on the deterioration in the credit markets and the impact that was having on the overall economy, saying that the Fed was prepared to respond.
According to the minutes, Fed policymakers noted the intensifying contraction in single-family housing, the strains in the financial markets, and a slowdown in consumer spending. "The information reviewed at the December meeting indicated that, after the robust gains of the summer, economic activity decelerated significantly in the fourth quarter."
But the Fed remained confident that its approach was the right one.
"Still, looking further ahead, participants continued to expect that, aided by an easing in the stance of monetary policy, economic growth would gradually recover as weakness in the housing sector abated and financial conditions improved, allowing the economy to expand at about its trend rate in 2009."
With the economic outlook "unusually uncertain," Fed policymakers decided at their last meeting to refrain from assessing the balance of risks of slower growth and higher inflation. Instead, "the committee agreed on the need to remain exceptionally alert to economic and financial developments and their effects on the outlook, and members would be prepared to adjust the stance of monetary policy if prospects for economic growth or inflation were to worsen."
The Federal Reserve's benchmark interest rate is now at 4.25 percent after three rate cuts since September. The Fed next meets on January 29 and 30, and expectations are high that the Fed will cut another quarter point. Federal funds futures contracts traded on the Chicago Board of Trade today pointed to a 76 percent likelihood of a quarter-point reduction by February.
In general, the minutes confirmed that the Fed is nearly unanimous in sharing the point of view outlined in speeches by Donald Kohn, the vice chairman of the Fed, and Ben Bernanke, the Fed chairman, more than a month ago. The two men focused on the deterioration in the credit markets and the impact that was having on the overall economy, saying that the Fed was prepared to respond.
According to the minutes, Fed policymakers noted the intensifying contraction in single-family housing, the strains in the financial markets, and a slowdown in consumer spending. "The information reviewed at the December meeting indicated that, after the robust gains of the summer, economic activity decelerated significantly in the fourth quarter."
But the Fed remained confident that its approach was the right one.
"Still, looking further ahead, participants continued to expect that, aided by an easing in the stance of monetary policy, economic growth would gradually recover as weakness in the housing sector abated and financial conditions improved, allowing the economy to expand at about its trend rate in 2009."
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