Wednesday, January 30, 2008

50 Bps ???????

I am at a loss for the move today. On the one hand I think the Fed can safely cut 50 without spooking the markets. There is a hope at least that swift cutting now can avoid us having to go all the way to zero if the recession gets out of hand. Remember that we went to 1% last time and we started from a higher funds rate.

On the other hand the SocGen incident has to be a little embarrassing personally for the FOMC. There is certainly the sense that they may have been jumping at shadows. This argues for 25 bps if any.

At the end of the day, however, avoiding the Japan type scenario has got to be the priority. And, with slowing global growth inflation concerns may be moderating so. 50 bps and say something like:


The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 3 percent.

In recent months the outlook for growth has weakened. Credit markets have remained strained and the slowdown in housing has continued to diminish output growth. Some businesses and households are finding it more difficult to obtain credit.

Commodity prices have moderated in recent weeks and inflation pressure appear to be weakening. Nonetheless, the committee will monitor incoming data for signs of increases in inflation expectations.

Some downside risks to growth remain. The committee is monitoring incoming data as it becomes available and is prepared to act in a timely manner to address those risks.


Notes:
Acknowledgment that oil prices are retreating. Direct references to financial institutions removed. Appreciable downside risk becomes some downside risk.

22 comments:

dWj said...

Let's play Taylor rule for a moment. Core inflation is about a point higher than what the fed would seem to like -- I'm kind of using a six-month average here -- and I could imagine a "neutral" interest rate anywhere from 4.0% to 5.25% or so. 4.0% still says you're a point below that now, so the Taylor rule with the original coefficients suggests an output gap of 3% -- and last I knew, the fed's long-term growth estimates had dipped below 3%. Is the Fed saying we're looking at a recession?

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