Release Date: December 16, 2008
The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.
What’s up with the “range” of rates? Well, they’d look pretty foolish if they said they wanted the rate to be at .25% and the market was already trading fed funds futures at .14% as of this morning. Calling the rate at .25% would be sort of like predicting yesterday’s weather.
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. No arguments there. Financial markets remain quite strained and credit conditions tight. I’m not sure that a lot of people are as aware of the strain on the financial markets as they should be. Overall, the outlook for economic activity has weakened further. Enough said there….
Meanwhile, inflationary pressures have diminished appreciably. Saying that inflationary pressures have diminished is being modest. Inflation is dead for now. 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. For inflation to moderate any further, deflation will become a huge issue. Let me rephrase that, in light of the Consumer Price Index report this morning, it’s pretty apparent that deflation is an issue.
The Federal Reserve will employ all available tools (available tools – oh and since we’re running out of ammo in our normal tools, we’re going to come up with some new ones. We hope that they work and we hope that they persuade people to start spending and borrowing money again) to promote the resumption of sustainable economic growth and to preserve price stability. Price stability – yeah, we are kind of concerned about that deflation thing and we’re afraid that all of the money we are printing is going to have a very negative effect on the value of the dollar and the value of our stock market investments, but we’ll worry about that some other time. In particular, the Read more