The Fed didn’t make a surprise rate cut overnight, unlike almost a year ago when it gave us rthe first of seven successive cuts as the credit crunch was born.
The key central bank left its Federal Funds Rate unchanged at 2%, but left no doubt it is very, very worried about conditions in financial markets.
That’s why it seems to be concentrating on making as much money available as it can, but not at a cheaper rate.
It’s not a question of price or cost right now, it’s quantity, and a lot of it, and support for the system as a whole.
It’s also why it convened a second big meeting in as many days after trading in New York to try and sort out the mess that is American Insurance Group, the big insurer (See next story).
And the fate of AIG might be what stayed the Fed’s hand on rates. Sorting out that is a bigger problem than the cost of money right now to a bunch of people on Wall Street who themselves and the system into trouble.
The Fed said in its post meeting statement:
"Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending.
"Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters.
"Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.
"Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.
"The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability."
That was a considerable change from the meeting in early August when inflation was pushed back to centre stage and the bias seemed to be towards a rate rise.
No more. It’s neutral, but ready to cut if one is needed, according to US commentators. The bits in bold tell the change.
Wall Street fell 100 points after the Fed’s decision, but then bounced by that much and more on rumours that the Federal Government or the Fed would extend a lifeline to stricken insurer, AIG.The Dow was up 141 points.
It had been thought that there was no chance the Fed would move rates, but the upsurge in volatility had analysts suggesting a cut of 0.25% to 1.75% for the Federal Funds Rate, might happen, just to take some pressure off the markets. It could have been half a per cent, according to some economists.
Merrill Lynch US economist David Rosenberg was one who believed the Fed will cut its fed funds target to 1.5% from 2%.
Macquarie Bank interest rate strategist, Rory Robertson is another who thinks the fed will cut, and has thought so for quite a while.
"I’ve always expected the Fed’s next move to be down," he wrote yesterday.
"Thus I’m very open-minded about further cuts in coming days and months.
"Indeed, the extent of unusual financial strains and US economic weakness today is greater than that which prompted aggressive Fed rate cuts earlier this year. Thus the case is strong for another 50bp rate cut as early as today’s FOMC meeting.
"In any case, the US economy is in recession, and prospects for a quick return to decent growth remain bleak.
"Jobs, industrial production and consumption all have fallen in recent months, dragged down by the intensifying credit crunch.
"Importantly, US headline consumer inflation is set to crash from 5.6% in July to 0-2% by this time next year, via lower oil and commodity prices," he wrote.
Inflation is falling: the Producer Price Index dropped 0.9% last month in a larger than expected fall and the Consumer Price Index showed a small fall. US retail sales fell 0.3% last month, compared to a revised fall of 0.5% in July (originally it was a drop of just 0.1%). That points to a sharper than expected contraction in consumer spending.
US business inventories soared 1.4% in July; almost three times the expected 0.5%, a real sign of stagnating demand from consumers.
The US Consumer Price Index fell 0.1% last month and the annual rate fell to 5.4% from 5.6% while the core rate remained steady at an annual 2.5%.
US unemployment will be boosted from the thousands of jobs to be lost at Lehman Brothers, Merrill Lynch and other financial firms still downsizing, and yesterday HP, the technology giant, revealed it was planning to cut 24,600 jobs over the next year, with half of those losses coming in the US as it merges the EDS data processing business it acquired last month.
According to a Bloomberg survey of economists, th
