The Fed Goes the Distance with Rate Cuts
Alex Carrick
Federal Funds Rate Cut to 2.00%
Yesterday, the U.S. Federal Reserve dropped its key benchmark interest rate, the federal funds rate, by a further 25 basis points (100 basis points = 1.00%). The keynote rate now stands at only 2.00% and is down 325 basis points from its peak level (5.25%) before the liquidity crisis raised its ugly head in August last year.
The federal funds rate at 2.00% provides a little more stimulus to an economy that is struggling under a weighty burden of negative news. In residential markets, housing starts remain depressed, unsold inventories (on a number-of-months-supply basis) are still climbing and home prices are in falling mode. The consumer is also under duress from gasoline that costs a fortune and employment prospects that are starting to waver.
Overall Economy Still Growing (slightly)
At the same time, according to data also released yesterday, the overall U.S. economy did exhibit positive growth (+0.6%) in the first quarter of this year, thanks to net export strength, an accumulation of inventories and strong spending on services. However, this does make for two quarters of uninspired growth in a row, with this year’s second quarter not expected to do much better.
The federal funds rate at its new level means that pretty much all of the interest rate stimulus that can be provided by the Fed has already been put in place. Essentially, it is up to the economy to improve on its own from this point forward. Normal cyclical factors − which are usually tied to low interest rates and bargain prices in some key consumer areas − have to start kicking in. The tax rebate checks from the federal government, which are about to be mailed, will help out in this regard.
A More Stable Greenback will help Fight Inflation
There is another interesting aspect with respect to interest rates being where they are now. There may be other reasons to expect further weakness in the U.S. dollar, but it won’t be because of falling interest rates. And if the U.S. dollar displays more stability, or moves on an upward path, this will help with prices. It will ease pressure on commodity prices and will lower import prices generally. The Fed has probably gambled correctly that inflation will not be a problem, at least until the economy gets back on its feet.
