The monetary central planners delivered an upside surprise of their own today, cutting both the federal-funds rate and the discount rate by 50 basis points. Stocks immediately surged when the numbers were released. The Fed had widely been expected to cut its main short-term interest-rate target by a quarter of a percentage point.
The vote was unanimous, and the statement is pure bull-feed. The words about market turmoil posing a threat to economic growth clearly indicate a Fed willing to respond to trouble on Wall Street even before there is clear evidence of a broader impact on the economy. The FMOC also signaled that further rate cuts could be coming. We can't help but be reminded of those words from earlier in the decade. Shock and awe. Pre-emptive doctrine. Let's Roll!
Some had said that the Fed might have to cut the target rate by at least 50 basis points, however, to have a real effect on the economy. For the past few weeks, the effective Fed Funds rate—the rate at which banks lend to each other overnight—has been well below the official target rate, prompting some to say there had already been a “stealth cut” in the rate. The argument was that if the Fed still viewed interest rates as posing a threat to the health of the broader economy, it would have to cut by more than 25 basis points.
Although the bulls charged into the market at the news, not everyone is happy about the decision. As the Wall Street Journal reported, many believe that the rate-cut is a bailout for speculators and Wall Street that poses a “moral hazard” problem. The words “Bernanke Put” are already on the lips of some.
“50 BPS=Fifty Bailout Points,” one bearish investor to us just after the cut was announced. "That sound you hear? That's the sound of Ben flying over head in his helicopter."
Ironically, the cut comes just a day after the Guardian quoted Alan Greenspan, who is perhaps most famous for holding down interest rates to historically low levels during his tenure as Fed Chairman, as saying the that "inflationary pressures are going to start to build." (Hat tip Barry Ritholtz's Big Picture.)
FOMC statement after the jump.
Federal Open Market Committee Statement.
Release Date: September 18, 2007
For immediate release
The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4-3/4 percent.
Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.
Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.
Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; Eric Rosengren; and Kevin M. Warsh.
In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 5-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, St. Louis, Minneapolis, Kansas City, and San Francisco.