The FOMC cut key rates by 75 basis points at their policy meeting today. The fed funds rate now stands at 2.25%, its lowest rate since December 2004. The discount rate was also cut by the same amount to 2.50%. Under financial market turmoil and economic contraction, the Fed has abandoned a gradualist approach to monetary policy, cutting the fed funds rate by 300 basis points over the last six months, sometimes 50 or 75 basis points at a time and once between meetings. The aggressive rate movements have caused some divisiveness on the board, with two committee members dissenting today’s decision. Nevertheless, the policy statement cites a weaker economic outlook with softer consumer spending and job growth, tighter credit and housing downturn as reasons for the large, simulative cuts. The Fed also warned that inflation expectations have risen, making the task of reviving economic growth without sparking inflationary pressures a tricky endeavor. The committee noted however that they expect inflation to ease under slower economic growth. The Fed will maintain its easing bias for now and has room to cut further as is deemed necessary to promote moderate growth over time and price stability.
Federal Open Market Committee Policy Statement
Release Date: March 18, 2008
For immediate release
The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent. Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters. Inflation has been elevated and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully. Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pinalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who pursued less aggressive at this time.
In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2.5 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 and San Francisco.
