It’s been 25 years since the fed funds target changed as much and as quickly as it has in the past nine days. Today, the Federal Open Market Committee (FOMC), the Fed’s policy arm, reduced the overnight bank loan rate by 50 basis points to 3.00%. The action follows fast on the heels of a 75-basis point cut on January 22. The FOMC gave prominence to financial markets, “which remain under considerable stress,” and tight credit conditions for “some businesses and households” in explaining its action.
This morning’s weak reading of fourth quarter 2007 Gross Domestic Product (GDP) certainly justifies the Fed’s concern. GDP, the total value of the nation’s output from domestic operations, rose a bare 0.6% (annualized). Residential investment dropped a shattering 24%, the eight straight decline, as housing suffers through its worst crisis in 25 years. Consumer spending grew just 2% and inventories fell, indicating a lack of confidence in future sales growth. For the full year, GDP increased 2.2%, the weakest rate of growth since 2002.
The FOMC’s statement concludes by cautioning that “downside risks to growth remain,” and that it “will act in a timely manner as needed to address those risks.” This is what used to be called an “easing bias,” meaning that the Fed is more likely to continue reducing the fed funds target than to stand pat or raise it. For now, the fireworks are over, but don’t leave yet.