The Federal Reserve showed the kind of restraint we haven't seen from that august body since sometime before this summer. It lowered its key lending rate a third-straight time, talked about the economy slowing down and left the door wide open to future cuts. But it didn't cut the discount window as far as many had expected and it refused to stop talking about inflation risks, although it noted that indicators on "core inflation have improved modestly this year."
This refusal to change this balancing outlook and the lower than expected cut in the discount window will dominate the way most people look at today's move. Although it conveyed broader concerns about the economy than it has in the past, the Fed certainly didn't send a message that it was in a rate cutting mood. Despite the growing view among economists and the general public that we are headed for a recession, the Fed refused to let the slowing economy become it's dominant policy concern.
The short message: economy slowing, inflation risk still remains, we're taking it slow, let's see what happens.
The quick reaction from Mr. Market: You're a wimp. I'm selling everything.
Reaction from Erin Burnett: She wears the infamous giraffe dress to bring out Jim Cramer's animal spirits. Cramer takes the bait, telling her that banks will fail, we'll have more bailouts and Hank Paulson's job of saving the economy from itself just got tougher.
Full statement from the Fed after the jump.
Release Date: December 11, 2007
The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/4 percent.
Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.
Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.
Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial 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; and Kevin M. Warsh. Voting against was Eric S. Rosengren, who preferred to lower the target for the federal funds rate by 50 basis points at this meeting.
In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 4-3/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, and St. Louis.