Federal Reserve policy-makers today lowered the federal funds target rate by 50 basis points to 1% and cut the discount rate, also by 50 bps, to 1.25%.
The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures, said a statement by the Federal Open Market Committee, which set the target rate.
Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports, the statement continued. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.
In light of declines in the prices of energy and other commodities and the weaker prospects for economic activity, the committee expects inflation to moderate in coming quarters to levels consistent with price stability, the committee said.
The stock market was buoyed by the news but reversed course and fell sharply in late trading. The Dow Jones industrial average closed down 74.16, or 0.82%, at 8,990.96; and the S&P 500 fell 10.42, or 1.11%, closing at 930.09. However, the Nasdaq composite was up 7.74, or 0.47 %, to close at 1,657.21. All numbers are preliminary.
The bond market got the 50 basis point cut it was expecting, said Kathleen Gaffney, co-portfolio manager of the Loomis Sayles Bond Fund. Stocks look a little soft; theyre marginally disappointed. They seem to be manic-depressive these days; theyre either way up or way down.
But bond-market observers queried whether the federal funds rate will be cut further.
The question going forward is whether well go lower, Ms. Gaffney said. Whats more important to the broad array of financial institutions will be access to the Treasurys TARP (Troubled Asset Relief Program) facilities.
Thankfully, the now discredited hawkish wing of the FOMC appears to have been properly muzzled, Max Bublitz, chief strategist at SCM Advisors, said in a statement. Today's move effectively cut in half the distance to what I believe will be the ultimate target funds rate for the current monetary cycle of 0.50%.