Well, the awaited FOMC announcement has finally come out and is a disappointment initially. The FOMC voted unanimously to leave interest rates unchanged at 2.00%. The Discount Rate was also unchanged at 2.25%. On the surface this was a disappointment based upon the financial meltdown we are seeing. The FOMC isn’t the one responsible for bailing out a bunch of greedy people who operated at 20-times leverage (or more) and this current problem is actually beyond what it can do smoothly without being accused of being a band called The Bailout Boys. But the criticism will still come for Ben Bernanke and friends at the Fed. Below are some of the summary comments and more detailed commentary and analysis.
The Fed noted that strain to the financial markets is up substantially and that labor markets have weakened further. It also sees inflation moderating later in the year, although its outlook remains uncertain. It sees tight credit, housing, and exports slowing to weigh on the economy. The FOMC said it would act as needed to promote growth and stability as downside risks to growth are a significant concern and upside risks to inflation are a concern. The long and short of it is that it didn’t say anything you didn’t already know. A full link to the statement can be accessed here.
Just last week no one really expected much from the Fed. Last night, the chances for a 0.25% rate cut were roughly 32%. This morning that was looking more or less like about a 44% chance. Ifyou go farther out on the futures expiration curve, the chances gonorth of a 100% probability that the next rate move is a cut. There iseven higher than a 50% chance that rates will come down by 0.50%.
Unfortunately, the FOMC can cut and cut and cut down the road. It won’t matter what the rates themselves really are. Therates can be advertised lower in the paper and in the windows, butvery few will be able to get a loan.
Jon C. Ogg
September 16, 2008