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Mix-Ansicht- Fed Cuts Rates 25 BP, Maybe For The Last Time - leibovitz, 12.12.2001, 10:14
Fed Cuts Rates 25 BP, Maybe For The Last Time
The Fed cut the fed funds rate 25 bp to 1.75%, the lowest rate since it began targeting that rate in 1989 and the lowest effective rate in over 40 years. It was the 11th in a series of rate cuts this year totaling 475 bp (B0590). The Fed also cut the discount rate 25 bp to 1.25%, the lowest rate since August 12, 1948 (B0598). The number of cuts is second only to the 1989-92 easing cycle. More importantly, the Fed maintained its easing bias.
Using the core PCE Price Index, the Fed's preferred measure of inflation, the real fed funds rate is about zero, the lowest since 1993 (B0490).
The Fed's statement was less terse than the past two:
Economic activity remains soft, with underlying inflation likely to edge lower from relatively modest levels. To be sure, weakness in demand shows signs of abating, but those signs are preliminary and tentative.
This was a little more hopeful than the past two, which stressed the weakness and uncertainty, leaving the Fed's policy options wide open. In other words, the Fed will be closely watching the economic data over the next seven weeks.
The Fed also repeated its optimistic belief that"long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate." But the Fed continued to acknowledge that"the necessary reallocation of resources to enhance security may restrain advances in productivity for a time," a point we have been making since September 11.
The Fed gave no clear indication that the easing cycle is over. But the fact that the Fed took a smaller step (25 vs 50) and acknowledged signs of improvement is a slight change in stance. As the economy improves, the Fed won't have a need to ease rates further. We believe these signs will become clearer and that the probabilities are 60/40 slightly in favor of this having been the last cut in this easing cycle.
Last Updated: 14:34 EST
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