The Federal Open Market Committee decided today to lower its establish a target range for the federal funds rate 50 basis pointsof 0 to 1/4 percent.
The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.
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.
Meanwhile, 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 to levels consistent with price stability.
Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee Federal Reserve will monitor economic and financial developments carefully and will act as needed to promoteemploy all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
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. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice ChairmanChristine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.
In a related action, the Board of Governors unanimously approved a 5075-basis-point decrease in the discount rate to 1-1/4/2 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, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent.
The Upshot
- We’re done with Fed Funds in entire.
- On to quantitative easing. (Japan had the advantage of running a current account surplus… how will it work for us with a deficit?)
- The princely rate of 1/4% gets paid on all reserve balances at the Fed, both required and excess.
- The Fed is looking at deflation, not price stability.
- The Fed will possibly invest more into long Treasuries, with uncertain prospects.
- The Fed will continue to make it up as it goes, and keep expanding its balance sheet, adding liquidity where it wills, and replace functions of the private lending markets in the name of fixing the lending markets.
I’m totally confused about what this means for the economy and how I should protect myself, my savings, and hopefully make money.
David, could you share your views in general terms? Something along, what themes you think will work?
I’m thinking that for 2009: infrastructure companies (pretty obvious), gold, silver, and precious metal miners, and safe dividend plays. Also, , an outlier is solar stock and alternative energy plays. I think Obama will play alternative energy, invest for the next generation card.
Why oil, using USO etf, tanked today beats me? You’d think oil is going to the $30s before it goes to the $50s.
Will gold and silver do fantastically well next year? Because the US dollar is going to make new lows, lower than this year’s lows.
How will consumers be able to save money if they get zero return on their savings? Certainly the best investment, best rate of return for consumers is to pay off their credit cards and save from like 7% to 30% in interest rate charges. So doesn’t this lead to lower consumer spending?
If commodity prices bottomed this year, and heat up or level off, then the Canadian currency may have bottomed.
Bought PM and MO today. Maybe “save” consumer, high dividended, bottom fishing stocks are a good play.
Hi David,
With regard to the idea that risk assets will decline until debt/gdp=150%, I don’t understand why a theory based upon a single data point (1930′s) is set in stone. Maybe in the era of fiat currency, 250% is the right number. Credit is a confidence game and if both lender and borrower have confidence that the debt can be repaid, then why can’t credit creation begin again at a higher level than in the 1930′s. Is it possible that Central Banks have the power to restore this confidence by finding the right level of raw reserves to pump into the system to re-ignite lending and thus broad money creation. Don’t get me wrong, I’m known as a bit of a perma-bear in my circles but I just see too much belief in the idea that 150% is the “right” level.
James