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Wednesday, June 25, 2003

So the Waiting is Finally Over

So the Fed has finally opted for a quarter point cut. Whether this counts as the kind of aggressive stance advocated the widely quoted Ahearne et al only history will tell us. My own feeling is that it probably wouldn't make a lot of difference, but that a half point cut might have indicated more determination. Yet even while the waiting on the decision is now over, the real wait is only just begining, the one which is to see whether the big ship is about to turn itslf round, or whether the slow downward descent will continue inexorably.

The Federal Reserve on Wednesday cut U.S. interest rates a quarter percentage point to 1958 lows and suggested it stood ready to take more action if the risk of falling prices worsened. The central bank's rate-setting Federal Open Market Committee trimmed the bellwether federal funds rate for overnight loans between banks to 1 percent, the 13th rate reduction since early 2001 in a campaign aimed at nursing the economy through a recession and back to vigorous health.

All but one member of the committee voted for the cut with San Francisco Federal Reserve President Robert Parry pushing for a more aggressive half-point reduction. "Recent signs point to a firming in spending, markedly improved financial conditions and labor and product markets that are stabilizing," the FOMC said in its post-meeting statement. "The economy, nonetheless, has yet to exhibit sustainable growth. With inflationary expectations subdued, the committee judged that a slightly more expansive monetary policy would add further support for an economy which it expects to improve over time," it added. Markets gyrated following the decision with blue-chip stocks falling and Treasury bonds turning lower but the dollar rising. Many in financial markets had been hoping for a larger reduction.

As in its statement following its meeting on May 6, the Fed was sanguine about prospects for future growth even as it voiced concern about the risk of deflation or falling prices. "On balance, the committee believes that the latter concern is likely to predominate for the foreseeable future." Recent data have shown the economy is still crawling back from a relatively mild recession in 2001, a sluggish pace that has pushed the unemployment rate to above 6 percent from under 4 percent late in 2000. Gross domestic product has expanded at around a 2 percent annual rate, well under the 3-to-3.5 percent pace seen as the U.S. economy's long-term potential for growth. The single bright spot -- largely stemming from low interest rates -- has been housing. Other key sectors like manufacturing have been in the doldrums.
Source Yahoo News

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