No real surprises with the Fed’s 0.25% cut today; the Federal Open Market Committee voted 8-2 to lower the target for the federal interbank funds rate to 2%, the lowest level since 2004.  Dissenting votes again came from Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser;  remember those names for future reference, particularly Fisher. 

Here’s a few interesting quotes from sources we read around the web on the rate cuts today……

“The U.S. economy remains weak enough that I would not dismiss another rate cut at the Fed’s June meeting.  You have to remember that the housing front remains incredibly bad – mortgage applications continue to decline – and we’re not moving into the peak selling season. If things don’t pick up in this sector, we’re going to see increased downward pressure on the housing market, and in turn the rest of the U.S. economy.”    - John Lonski, Moody’s Investor Service

Whilst they may have got their message across to the markets with this statement, pretending that the economy is not about to hit the skids could prove difficult later on… This was always going to be a hard statement to put together, and there remains much about this text that is highly unsatisfactory. On the one hand, we welcome the admission that some of the readings on core inflation have improved… But the text has also omitted the reference to “downside risks to growth” — which given that almost every bit of economic data has deteriorated since the last meeting, is so bizarre, that we cannot understand what the Fed is trying to do. Denying the inevitable slowdown in the real economy can only backfire on them. And so whilst we have to categorize this statement as clearly indicating a pause in rates, we have very strong doubts that the market will allow the Fed to get away with this act of denial, when the data between now and June 25 (the next FOMC meeting) keep plunging. –Rob Carnell, ING Bank

In a silent, but very lucid manner the Fed chief and the committee have clearly acknowledged the very real issues with inflation expectations that have developed and the non-trivial threat to Fed credibility should inflation not recede per an economy that is currently flat on its back. I do think that the vigorous Fed rhetoric from Mr. Fisher and Mr. Plosser in defense of their dissents over the past few months has gained traction in the committee. This statement strongly implies that the Fed will be on pause for some time, tolerate a rising rate of unemployment and hope that the reduction in aggregate demand provides the necessary easing in commodity and energy markets, The risks to the upside vis-à-vis inflation are serious enough to be on hold until the lagged impact of past Fed monetary policy and the fiscal stimulus on its way take hold. –Joseph Brusuelas, IDEAglobal

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