Fed Cuts Fed Funds and Discount Rates by 50 Basis Points, Issues Neutral Statement

Forex Fundamental Analysis Reports | Written by RBC Financial Group | Sep 18 07 19:43 GMT |

The Federal Reserve cut the Fed funds and discount rates by 50 basis points today in an effort to stave off an economic slowdown "that might otherwise arise from the disruptions in financial markets and to promote growth over time." The 50 basis-point cut in the funds rate to 4.75% was in line with RBC Economics' view, but was more aggressive than the majority of forecasters who looked for a 25 basis-point Fed funds rate cut. It was the first rate cut by the Fed since June 2003.

While today's cuts were more aggressive than many were looking for, the statement indicates that the Fed has assumed a more neutral stance, which lessens the odds that there are more rate cuts in the pipeline. In their statement, the FOMC implied that today's action should be enough to offset the downside risks emanating from the recent bout of financial market volatility.

The Fed's statement made clear they are not taking their eye off inflation, stating that "inflation risks remain and it will continue to monitor inflation developments carefully". On balance, the statement gives little indication that policymakers feel that rates must go lower. Rather, the Fed is biased to hold the funds rate steady, although the central bank will continue to watch the current economic data to guide policy decisions in the near-tem.

We expect the Fed to hold the funds rate steady going into 2008 and are holding to our view that these rate cuts will be transitory and reversed by the middle of next year as the threat from financial market volatility subsides and the risk to the inflation outlook starts to dominate concerns about economic growth.

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