Investing Adventures

Below is the statement released by the Federal Open Market Committee after its March 18 meeting on interest rate policy:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.

Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened.  Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

Inflation has been elevated, and some indicators of inflation expectations have risen.  The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization.  Still, uncertainty about the inflation outlook has increased.  It will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity.  However, downside risks to growth remain.  The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh.  Voting against were Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2-1/2 percent.  In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, and San Francisco.

Right after the JPMorgan / Bear Stearns deal, the Fed has cut the discount rate, the rate it lends to banks normally overnight, from 3.5% to 3.25%, now bringing it within 25 basis points of the funds rate, currently at 3%.  Remember that the FOMC meets this Tuesday as well with the markets potentially pricing in a cut from 50 basis points to up to 75 basis points.  If you’ve forgotten how to calculate the odds of a rate cut, check out this quick tutorial I wrote up a few weeks ago.

JPM purchases BSC for $2 / share and the Fed cuts the discount rate a quarter point?  Perhaps the Fed now knows that banks may actually fail and are doing something about it?  And now what happens tomorrow?  Do we rally on the news that the Fed is willing to cut even on a weekend or do we pull back due to the, what I think is, uncertainty in the other financials?  And will the Fed still cut 75 basis points off the funds rate Tuesday?  Too many questions right now I think before the markets can attempt a solid rally.

I’ll keep you updated if anything else happens this evening.