FOMC Decision to Hold Rates Causes Mixed Reactions

The Federal Reserve announced Tuesday that it would hold the Fed funds target rate at 2.00%, causing markets to sell off. Some economists viewed the decisions as a sign of strength; others were critical of the Fed's "weak" response to dangerous market turmoil.

Brian Bethune, chief U.S. financial economist at Global Insight, was disappointed with the call, but said it wasn't outside the realm of expectations.

He said the decision to hold rates was consistent with the 13-month pattern for the Fed to underreact to the ongoing crisis, and he disagreed with those who say a 50 basis point cut would have looked like a panic decision.

Traders at the New York Stock Exchange greeted the announcement with boos; Bethune said he would have joined that chorus.

In contrast, Larry Chorn, chief economist at Platts, called the action "a show of strength in the face of a shaken market confidence."

Similarly, ING chief international economist Rob Carnell said, "the Fed has opted not to be goaded into cutting rates after several days of eyewatering equity moves." He said the biggest surprise came in the statement on inflation, which was similar to the previous outlook save for the extraction of the concern for elevated inflation expectations.

"This is really asking us to ignore what we see happening to oil prices, to prices paid surveys, and to inflation data released earlier today, all of which point very clearly to lower, perhaps much lower headline inflation in the months ahead," he said.

The FOMC decision passed with all 10 members voting for the decision, marking the first unanimous decision since September 18, 2007.

The accompanying statement said "conomic growth appears to have slowed recently." The FOMC said labour markets weakened further and that "[t]ight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters".

On inflation, the committee said it "expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain."

"The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability," the statement read.

By Patrick McGee and edited by Sarah Sussman
©CEP News Ltd. 2008