Fed Press Release on Rate Cut

by Dollars and Sense

Via Doug Henwood at lbo-talk, who posted this under the subject line "Fed: kitchen sink included," with the note: "This is quite aggressive - more than expected, I think. They're pushing short rates close to 0, and planning to expand their purchases of longer-dated paper."

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

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.

The Federal Reserve will employ 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; Christine 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 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of 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.

Labels: Federal Open Market Committee, Federal Reserve, financial crisis, interest rates, recession

 

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12/16/2008 03:50:00 PM 0 comments

 

Washington's Double Standard

by Dollars and Sense

An editorial by Eduardo Porter in yesterday's New York Times points out the double standard in the U.S. government's response to the current financial crisis, vs. the remedies it has supported for the rest of the world: "Could this be the same United States that backed the International Monetary Fund’s get-tough strategy during the emerging-market crises in the 1990s—pushing countries from Asia to Latin America to slash government spending and raise interest rates to recover investors’ confidence and regain access to lending from abroad?" The IMF advocated—and indeed coerced—high interest rates and reductions in government spending. But the solution in the United States is lower interest rates and expensive stimulus spending. Porter cites Joseph Stiglitz (who was chief economist at the World Bank at the time that "structural adjustment" was forced on Asia and Latin America) as one economist who sees a double standard here. He cites Larry Summers, who was Treasury Secretary at the time of the 1990s financial crises, as one who denies a double standard.

We agree with Stiglitz and Porter. As D&S collective member and blogger Larry Peterson noted in an earlier posting:

In a shocking display of bad taste at best, and ignorance at worst, a Lehman Brothers economist referred to last week's Fed action as "shock therapy." Most of the readers of this blog will need no reminding that the same phrase was used to describe the structural adjustment programs that caused "lost decades" for much of the poor and developing world. The only difference, of course, is that "shock therapy" for them meant jacking up interest rates to stratospheric levels—and subsequent capital outflows which enriched many Western investors, while for us, it has meant a dramatic drop in interest rates.

The source of this comment from the Lehman Bros. economist? The New York Times, of course.

Labels: economic stimulus, IMF, interest rates, Joseph Stiglitz, Laurence Summers, shock therapy, structural adjustment

 

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2/24/2008 11:35:00 PM 2 comments