Wednesday, October 10, 2007

Summary of the Fed Meeting That Decided to Cut the Fed Funds Rate

Nice short summary of the why the Fed decided to cut the Fed Funds rate. From the WSJ:

Federal Reserve officials worried that credit-market turmoil could reinforce slower growth at a time of "particularly high uncertainty," leading to their half-point interest-rate cut last month, minutes from the meeting show.

Without a cut, there was concern that "tightening credit conditions and an intensifying housing correction would lead to significant broader weakness in output and employment," the rate-setting Federal Open Market Committee said. The minutes, released yesterday, also showed members worried that market turmoil "might persist for some time or possibly worsen." They offered no clues about the direction or timing of the Fed's next move. Based on comments by the Fed since the meeting, it appears that they are still concerned.

The Fed surprised Wall Street Sept. 18 with an aggressive cut in its federal-funds rate, which banks charge each other for overnight loans, to 4.75% from 5.25%. . . . . In his quarterly testimony to the European Parliament committee, Mr. Trichet noted that "tensions still remain," particularly in the asset-backed commercial-paper market. But he said investors are returning to high-quality commercial paper, rather than avoiding the sector entirely. He also noted that while the profits of some banks would be hurt by the upheavals, many others are "in a comfortable position to absorb the recent difficulties," because of solid economic growth and improved risk management.

The summary of the FOMC meeting hinted that at least some of the presidents of regional Fed banks had reservations about the change to the Fed's message about inflation. The summary said that all the voting members of the committee -- the Fed governors in Washington and five of the 12 regional bank presidents -- "judged that it was no longer appropriate to indicate that a sustained moderation in inflation pressures had yet to be shown," though they agreed "some inflation risks remain."

But the summary also noted that some "participants" -- a word the Fed uses to refer to those who join the discussion even if they don't have a vote -- "remained concerned about possible upside risks to inflation." Some of the most hawkish Fed officials aren't part of this year's voting rotation but are participants in the meeting.

The FOMC minutes show that officials last month decided against explicitly saying in a post-meeting statement whether the risk of weaker growth was greater than inflation risks, "given the heightened uncertainty about the economic outlook."

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