Fed Cuts Funds Rate 50 Basis Points

In another attempt to shore up the economy, the Federal Reserve on Wednesday lowered the federal funds target rate — the interest banks charge on overnight loans — by 50 basis points to 1 percent. The decision to cut the rate came unanimously, as well, with former hawkish Dallas Fed president Richard Fisher continuing to support a strategy of rate cuts. The Fed also unanimously approved a measure to lower the discount rate 50 basis points to 1.25 percent, as well. “In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability,” the Fed said in its policy statement Wednesday. In other words, inflation is off the table and downside risks to the economy now officially rules the day; the stance is a stark reversal from the policy of Oct. 15, which warned of possible inflationary risks. The rate cut, however, really merely formalized current trading levels already being observed in the market, with the effective federal funds rate trading below one percent since mid-October. “The Fed is trying to lean against the decline in velocity [of money supply] — which is essentially the same thing as a rise in the demand for money — by expanding its balance sheet aggressively and allowing the Fed funds rate to trade well below the 1.5 percent target,” said economist Michael Darda, according to a report by Yahoo! Finance. For all that the Fed did say in its policy statement, it what wasn’t said that is likely looming as large as any elephant in the room: housing and labor markets. Neither was mentioned in the policy statement, and have been absent from policy statements this entire month. “Fed officials may have simply concluded that the housing and employment troubles, as the key source of most other problems in the economy, no longer need to be mentioned,” the Wall Street Journal’s Sudeep Reddy mused. And, of course, there is still the question of what the rate cut means: some argue continuing cuts will reignite inflationary pressures, while others posit that cutting rates all the way to zero will do little to stimulate an economy that is collapsing along with housing — were that to be the case, we could be staring at a dreaded Japanese-style “lost decade” all our own. Write to Diana Golobay at [email protected].