As always, let's lead off with the statement itself. From the Federal Reserve website (which was noticeably slow due to heavy traffic around the time the statement came out):
The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 3 percent.
Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.
The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.
Today’s policy action, combined with those taken earlier, 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 continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.
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; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred no change in the target for the federal funds rate at this meeting.
In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 3-1/2 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, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Kansas City, and San Francisco.
I expected that if it turned out to be 50 basis points that someone might have preferred 25. To see Fisher vote for no change at all was a moderate (but not a complete) surprise. The lackluster GDP report probably didn't swing the committee one way or the other, but it does give them a little bit of room to say that these significant cuts are warranted in the face of an obviously slowing economy.
Notably there is nothing in this statement to suggest that they are done anytime soon. There is one token reference to inflation that is now almost boilerplate language. They lead off with a statement about "stress" in the financial markets, and I think that choice of word is very appropriate. It is no secret anymore that these measures are meant to head off any possibility that the financial markets would seize up and accelerate the downturn. They are taking the stand that it is more important to mitigate that risk than to doggedly pursue continued inflation reduction. They are betting that when the risk passes that they can remove this accommodation (faster than in '04-'05, I would both hope and expect) with little long term inflationary consequence.
At least it looks like that's the plan. I expect another cut at the next meeting, or possibly between meetings if there is significant "stress" in the financial markets. Size to be determined later. Some call it the "Bernanke put". But the article to which I link explains the nuances:
"It is not the responsibility of the Federal Reserve -- nor would it be appropriate -- to protect lenders and investors from the consequences of their financial decisions," [Bernanke] told a central bank gathering in Jackson Hole, Wyoming.
"But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy," he added.
The Fed's job is harder these days. In the old days they just worried about walking the tightrope between inflation and recession. Today, that problem still exists, but they must also worry about protecting the broader economy from the consequences of bad decisions in financial markets while still allowing those responsible for the bad decisions to get their comeuppance. In the end, the latter may actually be the more difficult problem.
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