Stocks plummeted today after a Federal Reserve governor warned that the U.S. central bank will not pursue an easy monetary policy to the detriment of its anti-inflation stance.
The Dow Jones industrial average closed down 227.49, or 1.77%, at 12,601.19; the S&P 500 fell 22.69, or 1.61%, ending at 1,390.71; and the Nasdaq composite closed down 43.99, or 1.77%, at 2,448.27. All numbers are preliminary.
The Federal Reserve has employed the hammer with considerable force in the last nine months, lowering the federal funds rate by 3¼ percentage points, with wide-ranging implications for the economy, Kevin Warsh, the governor, told the Exchequer Club in Washington. But even if the economy were to weaken somewhat further, we should be inclined to resist expected, reflexive calls to trot out the hammer again.
If the Fed were deemed too accommodative for too long, credibility could be undermined, threatening to create a persistent inflation problem that would have to be corrected at great cost, he added.
Mr. Warshs view was reinforced by the minutes of the April 29-30 Fed meeting released today which showed most members viewed the decision to reduce interest rates at this meeting as a close call. Fed officials also lowered their growth range forecast for 2008 to 0.3% to 1.2%, down from their January forecast of 1.3% to 2% growth, the minutes showed.
The Fed will next meet to discuss interest rates June 27-28. Wall Street analysts expected the funds rate to be kept at 2%.