FOMC Cut Funds Rate to Near 0%

The Federal Open Market Committee today cut the Federal funds rate more than expected to a "range from 0 to 1/4 percent." The discount also was cut to 0.50%. The latest Fed funds rate was its lowest ever. While the latest action was a greater cut than generally anticipated by economists, it had been mostly discounted by markets. During December the effective Fed funds rate traded between 0.15% and 0.52%.

Regarding economic growth, the Fed indicated that "Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further."

Regarding inflation it was indicated that "inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters."

Moreover, the Fed highlighted its concern about the recent turmoil in the credit markets. "The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level ... The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity."

The decision was unanimous amongst FOMC voters.

For the complete text of the Fed's latest press release please follow this link.

In addition to lowering the cost of credit in the effort to prompt economic growth, the Fed indeed has worked to promote faster growth in financial liquidity. Growth in the money stock measure M2 rose to 17.6% over the last three months, up from a 5% growth rate earlier this year. Growth in demand deposits alone jumped to 40% y/y. Direct injection of liquidity to the financial system is evident in the monetary base which is up by three-quarters versus last year. Also promoting U.S. economic growth these liquidity injections have started to impact the foreign exchange value of the U.S. dollar which is down 6% from its mid-November peak.

The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong is a new paper by John B. Taylor, Professor of Economics, Stanford University and Senior Fellow, Hoover Institution. It is available here.

Globalization and the Changing Nature of the U.S. Economy’s Influence in the World from the Federal Reserve Bank of Dallas can be found here.