(March 18, 2008) – The Federal Open Market Committee released the FOMC Press Release today, cutting the Fed funds and discount rates by 0.75%, a little less than the full point many expected in the wake of last weekend’s Hail Mary events.
As I have written recently, I believe the Fed’s recent moves are inadequate to restore order to the financial markets. They are trying to be clever by targeting (micromanaging?) exactly who has access to the available stock of reserves, rather than increasing the amount generally available.
This problem is not going to be solved by squeezing on a balloon.
The reason the Fed went for 0.75%, rather than a full point, is that 2 of the FOMC members are worried about inflation–something like Joan of Arc refusing the offer of a bucket of water to put out the bonfire because it might get her hair wet.
Worries about inflation today are misplaced confusion about the Fed’s role. The Fed does not print oil. Their job is not to attempt to control relative prices. Their job is to prevent the creation of a nonproductive asset class–the existing stock of tangible assets–that has long-term returns superior to long-term cash flow streams. That means not increasing the monetary base–and therefore, ultimately, tangible asset prices–in a long-term, systematic way that erodes the value of future dollars. Long-term bond yields today below 4% show they are not doing that. Monetary inflation–the job of the Fed–and growth-induced commodity price increases are entirely different animals.
The following is the text of the FOMC press release.
The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.
Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened.? Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.
Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.
Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting.
In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, and San Francisco.