Fed cuts target lending rate by 50 basis points
NEW YORK (Reuters) – The Federal Open Market Committee on Tuesday lowered the benchmark federal funds target rate by a half percentage point to 4.75 percent from 5.25 percent, where it had stood since June 2006.
The reduction was more aggressive than many investors had expected. A 25-basis-point cut was fully priced in by rate futures markets, but bets for a 50-basis-point reduction were pared sharply in recent days.
In a related move, the Fed also lowered the discount rate it charges for direct loans to banks by a half-point to 5.25 percent.
BILL O’NEILL, PARTNER, LOGIC ADVISORS, UPPER SADDLE RIVER, NEW JERSEY:
“Obviously this was a very substantial, aggressive move. I think it’s bullish for gold. I think it has potential inflationary implications.”
SCOTT FULLMAN, DIRECTOR OF INVESTMENT STRATEGY, I.A. ENGLANDER & CO:
Lower inflationary pressures combined with the liquidity problem continues to threaten the recovery in the housing market. It was apparent in the commentary that the Fed is concerned about the slowdown in the economy, reflecting that slowdown in the housing market would spill into the broader economy. There was commentary that the Fed would monitor the situations, which might include an increase if inflationary pressures return.
PETER BEUTEL, PRESIDENT, CAMERON HANOVER IN NEW CANAAN, CONNECTICUT:
“It does put some pressure on the U.S. dollar the lower the U.S. interest rates mean less attractive to park money here in banks here, it is good news for borrowers not good news for lenders. That puts pressure on the U.S. dollar.
In any event, it is also bullish for the economy, when the economy expands so does oil demand.”
ALAN RUSKIN, CHIEF INTERNATIONAL STRATEGIST, RBS GREENWICH CAPITAL, GREENWICH, CONNECTICUT:
“A 50-basis-point cut in the funds rate and the discount rate is a brave opening gambit in the easing cycle from a Fed chairman that for credibility reasons was expected to err on the side of caution. The market will now have to decide on whether this is a Fed that has jumped ahead of the curve or whether the Fed has simply panicked. This is very negative for the dollar, both from ‘the panic’ viewpoint, or the rate differential perspective. Some will also see this as a neglect of inflation risks. From a risky asset standpoint, the action may well add to fears that the Fed knows of more skeletons in the cupboard and this will restrain some of the immediate positive response from carry/commodity and EMG currencies.”
ROBERT MACINTOSH, CHIEF ECONOMIST, EATON VANCE MANAGEMENT, BOSTON:
“This is what I expected, but I didn’t want to see this. This is a pretty blatant bailout for excessive risk-taking over the past few years. This should make people less confident for the Fed to achieve their number one objective which is keeping inflation at bay. I don’t think they had to do anything right now. There is enough going on in the economy that they could have waited until another meeting, let some of this settle out, and then take another look at it. They overreacted.”
CHRIS JARVIS, SENIOR ANALYST, CAPROCK RISK MANAGEMENT, NEW HAMPSHIRE:
“I definitely am surprised given where commodities were tracking and given where the dollars been. This is either a ‘one and done type of scenario’ or they’re probably seeing things that are a lot worse than what we’re seeing on the surface. Over 25 basis points is definitely a surprise and it could be an indication that growth, given the credit crunch, is more at risk than they previously anticipated.
“If you cut the rates, the long bond yields are going to go up and the short ends are going to go down… that’s actually going to be dollar supportive because the higher the yields are on the 10-year it will have more of an impact on currency. It will be interesting to see how the dollar reacts to this. Initial reaction might be to get beat up a bit but I wouldn’t be surprised to see the dollar rally now.
“Given the aggressive rate cut (s), the back end of the curve might sell off, which could be dollar supportive as the FOMC reinflates growth.
DAVID DIETZE, CHIEF INVESTMENT STRATEGIST AT POINT VIEW FINANCIAL SERVICES, SUMMIT, NEW JERSEY:
“Wall Street is embracing this move because it reflects the proactive Federal Reserve who is now aggressively trying to forestall the risk to economic growth that is arising from the weakness in the housing market.
Instead of being behind the curve, which many investors accused the Fed of being from early summer, they are now showing the Street that they will no longer tolerate a potential for the seizure in the credit markets to seriously dent economic growth. Investors took comfort in that this was a unanimous decision.
The sell-off (in long-dated government bonds) indicates three things. That this does nothing to keep the risk of inflation at bay. This increases the risk that perhaps the inflation genie sometime down the road does come out of the bottle. Inflation is the enemy of the long-term bond.
The second reason is that this increases the chance of a rebound of in economic growth and a stronger economy, which means a greater demand for investment money, which increases the interest rate on long-term bonds. Thirdly there could be some concern on the part foreign holders of our debt that the interest rate cut could hurt the value of the dollar and therefore make dollar denominated holdings like Treasury bonds somewhat less attractive.”
WILLIAM RUTHERFORD, PRESIDENT, RUTHERFORD INVESTMENT MANAGEMENT LLC, PORTLAND, OREGON:
“The yield curve steepened considerably because investors are now more optimistic about the outlook for the economy. The Fed’s action was brilliant. It was exactly what was needed. It gives people confidence in the idea that the economy can make progress. The economy had been softening and there was discussion about a risk of recession. The focus will now be on inflation, but the Fed had to act on the problems that were in front of it and the problems were serious and they did what was appropriate. Bernanke did not want to be known as “day late and dollar short” Greenspan. Bernanke wanted to be pre-emptive.”