Wednesday, January 23, 2008


The Fed's inter-meeting 75 bps cut yesterday came as a complete surprise (at least to me). I've previously noted that Fed Funds expectations were for a 50-75 bps cut at the next meeting on January, 29-30.

The statement cited a weakening economic outlook, increasing downside risks to growth, continued deterioration in broader financial markets, tightening credit for some businesses and households, and a deepening housing correction as the reasons for the target rate change.

That said, what's the point of cutting rates inter-meeting a week early? One week will hardly make a difference, given the lag of monetary policy. My only hypothesis is that the FOMC had already been discussing the action - which was mostly based on economic conditions - and they released the statement early, in response to overseas and overnight US futures trading. However, that begs the question of why the FOMC was swayed by equity market conditions.

In addition, and possibly more interestingly, Fed Fund futures still assign a 40% probability of the FOMC cutting another 25 bps next week...

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