Press Release
Release Date: January 22, 2008
For immediate release
The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent.
The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.
In a special meeting the Fed lowers rates by a whopping 75 points - exceeding expectations of a 50 point reduction at the regular meeting next week.
Seems like a panicky response to the economy. So, how'd the market perceive it? As a panicky response!
As I understand the current mess (and I again note that what I know about economics could be written in large block letters on a postage stamp), the problem is not only that folks can't get loans to tide 'em over (a "liquidity" problem), but that the underlying value of their assets has really plummeted - which is a "solvency" problem that won't be solved by cheaper credit.
Add to this the fact that our war-related spending has fed a massive budget deficit, and that we're paying $90/bbl for stuff we burn up, and things are looking pretty bleak. Whatever tax incentives/rebates W and Congress come up with to "jump start" the economy have to be short-term if we're not to default on our debt. We can't really afford much in the way of increased gov't spending. The Fed can't keep lowering rates without flirting with inflation.
'twixt a rock and a hard place, we be!
As Billy Ray Valentine observed of the pork belly market, "They're panicking out there right now, I can feel it."
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