U.S.: FOMC Cuts Fed Funds Rate by 50bps, with Dovish Bias
U.S.: FOMC Cuts Fed Funds Rate by 50bps, with Dovish Bias The Fed cuts interest rates by 50bps to 1.00%. The accompanying statement appears to point to a downward bias for future monetary policy. The tone of the communiqué was decidedly dovish.
The U.S. FOMC (unanimously) decided to reduce the fed funds rate by 50bps to 1.00%, coming on the heels of the coordinated 50bps cut earlier this month. The tone of the report was very dovish, and stuck closely to the script set out just a few weeks ago in its intermeeting decision. Indeed, while the Fed believes that this decision, along with its past actions will “promote a return to moderate economic growth”, it does go on to say that “the downside risks to growth remain”, which we believe is a signal from them that they may be prepared to take further action.
The economic assessment was particularly dovish. The Fed noted that the pace of economic activity “appears to have slowed markedly”, on account of the decline in consumer spending. It also noted that business spending and industrial production have also weakened in recent months. Moreover, the Fed stated that it expects “slowing economic activity in many foreign economies is damping the prospect for U.S. exports” – which has been a key source of strength for the U.S. economy.
On the inflation front, the statement omitted any mention of the upside risks to inflation, noting that “the Committee expects inflation to moderate in the coming quarters to levels consistent with price stability.” In doing so, the Fed appears to have shifted its focus decidedly from any concerns about inflation to the outlook for growth, which is a significant departure from its previous stance.
In terms of the ongoing financial crisis and its impact of the real economy, the Fed noted that “the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit”, which is fairly similar in language of the previous statement.
The Fed’s decision to provide further monetary stimulus to the U.S. economy is clearly part of its aggressive response to the ongoing economic deterioration and financial sector crisis, and is indicative of its steadfast determination to get ahead of the curve (or at least to catch up) in both regards. Indeed, with economic activity appearing to have ground to a halt in the second half of the year, and the financial crisis continuing to stifle the effectiveness of the substantial easing in the past year, the Fed appears have signalled its willingness to do more in the future. This is not a certainty given the practical challenges that exist when a central bank rate goes below 1.00%, but it remains a risk worth focusing on.
TD Bank Financial Group
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.
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