The Fed acknowledged an improving labor market and rising oil prices while also downplaying the threat of spillover effects from Europe, that is, now that the European Central Bank has finally seen fit to print up more than a trillion dollars for the greater good.
The Federal Reserve kept interest rates near zero on Wednesday and said the economy is improving. But the Fed also pointed out ongoing job losses could dampen a recovery.
The Federal Reserve kept its key interest rate near zero Wednesday, and said in a statement that although the U.S. economy remains weak, there are signs of a recovery.The central bank said that the pace of the nation's economic decline is slowing and that household spending is showing signs of stabilizing.
It also said conditions in financial markets have generally improved in recent months, and that while businesses continue to cut back staff and spending, their inventories are coming into line with demand...
The Fed has now kept its federal funds rate, an overnight lending rate that impacts rates on various consumer and business loans, in a range of 0% to 0.25% since December. And despite suggesting that there are signs of progress, the Fed reiterated that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
"The economy is only now beginning to show signs that it might be stabilizing, and the upturn, when it begins, is likely to be gradual amid the balance sheet repair of financial intermediaries and households," Kohn told a conference at Princeton University.
"As a consequence, it probably will be some time before the FOMC will need to begin to raise its target for the federal funds rate," he said, referring to the Fed's policy-setting Federal Open Market Committee...
"To ensure confidence in our ability to sustain price stability, we need to have a framework for managing our balance sheet when it is time to move to contain inflation pressures," he said.
The central bank typically sets a specific target for its federal funds rate instead of a range. The rate had previously been at 1% and this marks the first time the Fed has cut rates below 1%. Most investors were expecting the Fed to cut rates to either 0.25% or 0.5%.
The federal funds rate is an overnight lending rate used as a benchmark to set rates for a variety of loans, including adjustable rate mortgages, credit cards, home equity lines of credit and business loans. This marks the tenth time it has cut rates in the last 15 months.
After what is likely to be the last in a long series of interest rate cuts Tuesday, the Federal Reserve is expected to continue its new, perhaps more effective monetary strategy: printing lots of money.The Fed traditionally uses its rate-cutting tool to encourage lending and boost the economy. But despite a staggering 4.25 percentage points of cuts since September 2007, the economy has not improved - in fact, it has gotten worse, drifting in to a recession last December.
Economists expect the Fed to produce one more cut to its benchmark funds rate at the conclusion of its Federal Open Market Committee meeting Tuesday, trimming the rate to 0.5%, the lowest level on record. Whether one last rate cut will help stimulate economic growth remains to be seen.
At any rate, the Fed will likely continue to use its new favorite tool, quantitative easing, "Fed-speak" for pouring new money into the economy.
My thoughts: Inflation has been the number one threat since the Fed started cutting interest rates. A market correction was needed, but the Fed tried to delay it; thus making matters worse in the long run.
The rate cut put the central bank's federal funds rate at 1%. That matched the lowest level for this overnight bank lending rate ever -- the last time it was at 1% was from June 2003 to June 2004.
The Federal Reserve is widely expected to cut interest rates again next week. But could the Fed soon go where it has never gone before and bring them below 1%?My thoughts: Expect a 0.5% cut to 1%. Easy credit will not solve the economic problem caused by easy credit.The Fed lowered its federal funds rate, the benchmark overnight lending rate at which banks lend to one another, by a half-percentage point to 1.5% in an emergency announcement Oct. 8.
Many investors believe the central bank will cut rates by at least another half-percentage point following the end of a two-day meeting on Oct. 29.
In fact, the fed funds futures on the Chicago Board of Trade are now pricing in a 26% chance that the Fed will cut rates by three-quarters of a percentage point to 0.75% by that meeting.
Joint Statement by Central Banks
Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets.
Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.
Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions.
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The Federal Reserve, working in coordination with other central banks worldwide, enacted an emergency interest rate cut on Wednesday.
The Fed lowered its fed funds rate by half of a percentage point to 1.5%. This rate is the central bank's key tool to affect the economy. Lowering the rate pumps money into the economy by reducing the borrowing cost on a broad range of loans, including credit cards, home equity lines and many business loans.
"The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability," the Fed said in a statement.
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The cut, the seventh since September, was modest by recent standards, reflecting upward pressure on inflation from higher food and energy prices and the weak dollar. Those trends suggest further rate cuts might do more harm than good in the months ahead...
