There were some surprises about the lack of a cut from the Fed on 16 September; however, as our chie...
There were some surprises about the lack of a cut from the Fed on 16 September; however, as our chief investment strategist Liz Ann Sonders points out, the door is still open.
"The case for a cut was based on a weak economy, Lehman's collapse and AIG's woes, lower inflation readings, plunging commodity prices, a stronger dollar and a desired lower cost of capital for banks," she says.
"The case for not cutting rates was the Fed wanting to keep some powder dry for future turmoil, at the same time reflecting that the financial crisis is more about solvency than liquidity."
The accompanying statement was a bit of a shocker in its mildness, with the only reflection of the market's chaos noted by: "Strains in financial markets have increased significantly".
Another relatively odd comment: "Downside risks to growth and the upside risk to inflation are both of significant concern ...
"The committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain."
This was only a very mild adjustment to the Federal Open Markets Committee's comments about inflation relative to their statement accompanying their meeting on August 5.
"I was quite surprised by this given the recently stronger dollar, the collapse in commodity prices, the weakening global economy (the September state-ment admitted the export boost will fade), and a decline in the latest consumer price index (CPI)," says Sonders.
Ostensibly, the Fed opened the door to an inter-meeting cut by saying: "The committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability."
But the members probably decided to take no action on 16 September due to the fact that even with 325 basis points of rate cuts since last September, as well as various emergency loan programmes, a revival in lending among banks has not arisen.
Former Dallas Fed President Robert McTeer may have put it best when he said to Bloomberg Radio just prior to the meeting: "We have a very concentrated problem in housing that's not really a rate problem; and we've got a financial crisis that's not really a rate problem."
The Fed members did signal they will continue to address market turmoil in a more targeted way with emergency lending while aiming monetary policy at a longer-term economic forecast.
- The Fed's decision to hold rates in September was widely expected;
- The door is not closed to a further rate cut, however;
- US monetary policy is focused on the longer term economic forecast.
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